Inflation: The Enemy of Economic Growth

Inflation has been eating away at profits for many retailers. The Consumer Price Index (CPI) measures the annual change in prices paid by consumers, calculated as a weighted average of prices for a basket of goods and services representative of aggregate consumer spending. When the pandemic began, global inflation was decreasing, and the downward trend persisted throughout the early months of the crisis. However, rising costs since late 2020 have progressively driven inflation upward.

In September, the Eurozone aggregate inflation rate was at 10 percent, well above the ECB target of 2 percent. Many retailers have responded by raising prices, shrinking package sizes, cutting promotions, or increasing prices. Integrated dynamic pricing and online marketing automation solutions are required to assist retailers to regain control, saving time and driving profitable growth — optimizing pricing and maximizing returns from all channels.

The Essence of Capitalism and the Financial Crisis

Aline Schuiling, senior economist for AMRO Bank, speaking at Omnia Retail Price Points Live, simplifies it by saying, “Prices in a market economy will always rise and fall; if you spend one euro today, it's not the same euro you spent yesterday.” Food and energy have been the most significant contributors to high inflation rates since mid-2021, and Schuiling provided an eye-opening statistic: “In Europe, energy prices are 40 percent higher than they were a year ago.”

While central banks can impact the domestic economy, food and energy prices are affected by external events such as the war in Ukraine, with Ukraine being a major global agricultural product supplier, as well as Russia's halted fuel supply to the West. High energy prices were also caused by resource mismanagement, due to the gas supply not being regulated during the pandemic, resulting in global shortages. Global supply bottlenecks have had long-term impacts on inflation rates because of lockdowns.

Governments around the world are attempting to combat rising inflation through subsidies. “The good news is that European governments are contributing to offset the cost of gas to protect households and businesses,” said Schuiling. Global interest rates have also increased in an attempt by central banks to counter inflation. Increasing borrowing costs should deter consumer and business spending and make banks more cautious in lending decisions. The FED began hiking interest rates in March 2022 and has already increased rates by 300 basis points; the ECB began raising by 125 basis points later and is expected to continue aggressively until the end of 2022.

Smarter Strategies to Navigate Inflation

A dynamic pricing solution allows retailers to automate pricing strategies efficiently and at scale, no matter the complexity or assortment size. These solutions empower any pricing team with a flexible rule system. It allows for experimentation with new strategies on a product or category level while remaining flexible and agile with quick response times. Furthermore, there's no need for IT development time to make fast price changes. An integrated solution allows retailers to focus on strategy with end-to-end automation, allowing employees to use their time more efficiently by automating daily operational decisions.

It saves retailers time through automated competitor data collection, price calculations, and price updates in their ERP. This allows retailers to concentrate on strategic choices that help grow a business. Finally, these types of solutions deliver better customer relationships as it creates clear pricing policies across an entire organization. Moreover, pricing software delivers price elasticity insights and generates exports to feed external systems with pricing information.

Other strategies available to retailers include leveraging consumer psychology to increase sales. Speaking at Price Points Live, Patrick Fagan, co-founder of Capuchin Behavioural Science, gave a clear example: “Guinness, the beer brand, saw an increase of sales by 25 percent just by creating the Guinness beer glass and having large cardboard signage in the aisles. These act as slight nudges to influence a consumer’s purchase behavior.” Simple but effective strategies such as these allow retailers to take back control when inflationary pressures are increasing.

Inflation, Interest Rates, and an Impending Recession

Inflation is forecasted to rise in 2023, but should decrease in 2024, returning close to the ECB’s target. For the average consumer, this means higher bonds and mortgage rates. All while real wages are collapsing — as inflation rises and wages remain stagnant. While governments try to assist with subsidies, this doesn't go far enough to bridge the gap created. Retailers require a dynamic pricing solution to thrive during economic downturns.

Sander Roose is the founder and CEO of Omnia Retail, pricing software for retailers and brands.