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-90 s).
The slump in house prices, predicted when interest rates started to rise at the end of 2003, did not materialise . The true casualty was the DIY sector, as remortgaging levels fell and home-improvement projects were put on hold. If marketers in this sector are starting to see light at the end of the tunnel, it may turn out to be an oncoming express from Threadneedle Street. Equally vulnerable are sectors such as electricals. Businesses that have sold high volumes of flatscreen TVs in the past few months may find consumer spending on such items a little more muted — even if prices fall. Inflationary pressures are not just countered by price increases, but by pressure on costs, too, including marketing budgets. Very much a bad thing.
Whatever the macro picture, it should not detract from the fundamental exchange process at the heart of marketing — producing goods and services people want to buy. If a brand’s sector is affected by inflation, a clear strategy for dealing with it is needed. For example, an inflationary market can make it harder to hit targets and may result in equity-damaging practices : prices go up, critical price points are broken, demand falls, sales fall, companies panic, a fresh promotions epidemic breaks out and brand equity takes another hit. At times like this, the value of sustained investment in advertising should be remembered. This places a great onus on the marketing and commercial teams to develop a clear, consistent and complementary product and pricing strategy. It is also important to ensure that any sales decline is diagnosed correctly.
There is no point losing a good product just because the economy is not doing very well. If we are entering an era of inflation, marketers need to invest time in analysing the relationship between their products, prices and the marketplace. Even if talk of inflation is all spin, there is no harm in developing a more robust understanding of this relationship and asking what impact inflation is having on buying habits and whether products still deliver value. On the latter point, it is worth returning to the equation that value equals satisfaction minus price. So, it is fair to say that inflation is neither a good nor a bad thing; just one more ‘thing’ for marketers to deal with. No need for panic, then. After all, we have been here before and survived.