Magazine article Marketing

News Analysis: Inflationary Pressures

Magazine article Marketing

News Analysis: Inflationary Pressures

Article excerpt

As inflation reaches a 15-year-high, Andrew Challier and Phillip Gaudoin examine the implications for marketers.

In 1066 and All That - that irreverent trawl through English history - events are categorised as either 'a good thing' or 'a bad thing'.

In recent weeks, Marks & Spencer's chief executive, Stuart Rose (evidently 'a good thing' for the retailer), said: 'The appetite for reducing prices seems to have diminished a bit. Businesses are seeing price inflation coming through.'

This signalled a declaration of the end of retail deflation as we know it and the return of price inflation. Indeed, it emerged last week that retail prices index (RPI) inflation in December was 4.4% - its highest for 15 years.

Where's the spin?

The government's economic tenet is low inflation, so expect successive rises in the interest rate until inflationary pressures have been brought under control. This may not, of course, prevent certain vested interests hyping it all up - inflation is a powerful negotiating point for the unions, among others - but it does suggest a bit of balance needs to be applied.

At the risk of scratching around the edges of economic theory, general inflation is something of a zero-sum game. Wage inflation rises as people seek salary increases to maintain the real purchasing power of their pay. This is reflected in rising costs to businesses, which pass these on to consumers. Thus a wage-price spiral is born. Clearly a bad thing.

Implications of inflation

Businesses of all denominations would probably welcome some inflation; it is good for margins and helps pay for cost-adding initiatives which may become a bit more important in the future (carbon trading, anybody?)

The same is true of suppliers, many of whom have had to suffer a squeeze at the hands of retailers in recent years. In this way, price inflation can be a good thing, as long as it outstrips the rise in costs.

The problem is that interest-rate rises, which are designed to put a lid on inflation, do so by slowing demand. As a rule of thumb, the real casualties will be in those sectors that are high-ticket and/or highly discretionary. Areas such as food tend to be quite resilient - as Maslow's hierarchy of needs kicks in - as do the value sectors (witness the growth of Matalan et al in the early-90s).

The slump in house prices, predicted when interest rates started to rise at the end of 2003, did not materialise. …

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