Raw materials, labor, energy, transportation: everything is becoming ever more expensive. But that's not all: the rising costs of important input factors are endangering the profitability of companies. With our interactive inflation calculator, you can quickly find out just how much price increases are impacting your company's earnings and how price increases to your own customers can provide relief.
A spectre is haunting Europe - the spectre of inflation. Consumers are feeling the effects of rising prices, especially at the gas pump, in the supermarket or when heating their homes. But entrepreneurs are also feeling the effects of inflation. Rising prices for energy, precious and industrial metals, the transport of goods, but also the hefty wage demands of the unions are putting a strain on company balance sheets. While major players such as Deutsche Bahn and supermarket chains have announced price increases, small and medium-sized companies are hesitant, worried about their customer relationships. To be able to react properly to the increased prices, companies first need an overview of how inflation affects their specific cost structure.
Price development of important input factors: Everything is not getting more expensive. But everything that is important to companies is.
In reporting, inflation is always viewed from the consumer's perspective with the help of the consumer price index. The index measures inflation as the change in the price level of a representative consumer basket of goods. Analogous to the consumer price index, the import price index measures the cost of a basket of goods from the perspective of an importing company. The producer price index, in turn, measures the price level of intermediate inputs and thus of goods sold domestically by companies to other domestic companies. Together, the three price indices thus reflect the entire value chain of companies:
A closer look at the development of the three price indices shows that import and producer prices initially fell much more sharply than consumer prices at the start of the Corona pandemic. Thus, companies did not fully pass on the temporary drop in purchase prices to end consumers. Conversely, the prices of imported goods and inputs have risen more strongly than consumer prices since 2021. Currently, they are unmistakably above the current consumer price level. But what is driving the increased import and producer prices? A look at selected goods shows that the prices of important raw materials in particular have risen sharply.
But what is driving the increased import and producer prices? A look at selected goods shows that the prices of important raw materials in particular have risen sharply.
From A for aluminum to Z for zinc: Since the beginning of the Corona pandemic, the prices of industrial metals have almost doubled. Today they are well above pre-crisis levels. In companies, the price increase is leading to a significant rise in the cost of materials and purchased services. In some industries, production has already had to be temporarily halted, for example in the steel industry. The steel industry is unable to cover its costs due to the current high price level. In the automotive industry, too, many assembly lines are at a standstill due to a lack of semiconductors.
In addition to raw materials and intermediate products, companies are dependent on energy as part of their production processes. This, too, has become massively more expensive:
Companies, just like consumers, are affected by the increased cost of oil, gas or electricity. Some sectors, such as the steel industry, have very high energy requirements in their production processes. In addition to these costs, personnel costs in Germany, a high-wage country, are rising quasi-automatically due to wage mechanisms, among other things
Due to increased inflation and the chronic shortage of skilled workers, employers are also faced with unusually high demands in the collective bargaining rounds.
In addition to the increased costs in the manufacturing process, transportation costs are rising. This is hitting the internationally strongly networked and export-oriented German economy particularly hard. The so-called Baltic Dry Index measures the cost of shipping goods internationally. Since its low point during the Corona crisis, it has increased almost tenfold:
Increased prices are placing a heavy burden on companies. Nevertheless, not all goods and services required by companies have become more expensive. The cost of computing power, for example, is falling steadily due to immense technological progress.
Corporate financing costs have also been falling for years and have not risen sharply, in part due to government assistance programs during the Corona pandemic, despite increased uncertainty:
Unfortunately, these cost reductions only help the German economy to a limited extent. The larger tech companies in particular are benefiting from the savings on computing power, while manufacturing SMEs are hardly benefiting at all. The low financing costs also have a downside, because at the same time the prices for commercial space and other capital goods have risen massively. In view of this development, the question arises as to whether prices will continue to rise in the future. It is true that forecasts are notoriously difficult when they concern the future. However, a look at the causes of inflation gives an idea of what entrepreneurs can expect in the coming years.
Causes of price increase:
No one intends to raise prices.
The causes of price increases are complex. Roughly speaking, short-term and long-term causes can be distinguished. The prices of a wide variety of goods rise in the short term due to acute, real shortages. In particular, interrupted supply chains and low inventories lead to massive shortages for many goods, although these should be reduced in the medium term by the incentive of increased prices.
Moreover, in the long term, prices will also be rising worldwide according to some economists, as a result of the massive expansion of the money supply by central banks. In Germany in particular, a reduction in energy costs in the medium term appears unrealistic against the background of the politically desired transformation toward renewable energies. Ultimately, despite all the assurances of politicians, the constantly growing bureaucracy, for example in the wake of the Supply Chain Act, is also leading to a long-term increase in costs for companies.
In addition to the chronic shortage of skilled workers and the planned minimum wage increase, demographics will also lead to increased competition for bright minds in the coming years.
Estimating long-term price trends:
Temporary or not temporary, that is the question here.
According to current estimates by the economic experts, the rise in inflation is merely a temporary phenomenon. From 2022, inflation is expected to fall again to a level below 2 percent. On the commodity markets, forward contracts can be used to determine the current price expectations of the market. The entire commodity market is in a phase of "backwardation". This refers to a market phase in which the price for the delivery of a barrel of oil in the future, for example, is lower than the current, so-called spot price. This suggests that the enormous rise in the price of some commodities is a temporary phenomenon.
What is not temporary, however, are the long-term effects on the prices described above. Companies must therefore ask themselves how they should assess price developments in the future, how strongly these will affect profitability, and what measures should be taken to avoid ending up as inflation losers.
Inflation winners and losers: Market power makes it easier to raise prices.
Increased costs due to inflation have a direct impact on companies' income statements. Companies that rely on input goods, which are subject to particularly high and long-lasting inflation, are particularly affected. For them, it is crucial whether they can compensate for the increased costs, for example through productivity increases, or pass them on to customers.
The latter depends above all on the market power companies can wield. So-called price setters are well able to enforce price increases on customers. This is particularly true of companies in industries with high barriers to market entry, such as pharmaceuticals or technology. A strong brand also helps companies to enforce their prices, especially in the B2C market.
Price winners, on the other hand, find it difficult to enforce price increases on customers because they are often suppliers without a competitive edge, competing with similar competitors in a fine-grained competitive structure. Whether companies are among the winners or losers of inflation therefore depends on how severely they are affected by inflation and how well they can implement price increases in order to keep their own profit margins constant or even increase them.
You can quickly find out just how much price increases weigh on your company's earnings and how price increases affect profitability with the help of our interactive inflation calculator.
Recommendations for action: How should companies respond to rising input prices?
Companies can respond to rising costs with three basic strategies:
- Cushion the cost increase or hedge against short-term price increases, for example by renegotiating supplier contracts or tying supplier contracts to official price indices.
- Optimize the company's own cost structure and thereby increase productivity, for example by reducing scrap or introducing new types of production processes.
- Passing on increased costs to your own customers through price increases.
What questions do you have about inflation? We will support you with individual advice on the inflation calculator and effective implementation assistance. Feel free to contact us. We look forward to your inquiry!