We explain what stagflation is and why interest rates are raised to contain inflation.
Find out what your company can do to fight inflation and stay in business. Are you familiar with the term reduflation?
Inflation is already having a significant impact on consumers and businesses . We are being warned that a hot autumn will come due to rising prices , and a winter in which we will be cold due to the high cost of energy and oil.
What scenarios are faced by companies in an inflationary context?
But that is not all. Recession is looming at the doors of the European Union and our country faces all these challenges with a heavy debt. In addition, we are faced with the need dominican republic email list to increase defence spending, which means going into even more debt to buy weapons, or taking resources from other budget items.
In this context, there is a risk of entering into stagflation.
Stagflation refers to the economic situation in which, within an inflationary situation, the economy stagnates and the rate of inflation does not subside .
Stagflation combines the terms stagnation or recession with inflation. A very dangerous situation for any economy. In this situation, the following occur simultaneously:
2) Why are interest rates rising to contain inflation and how does this increase affect inflation?
In March of this year, the ECB denied that it was going to raise interest rates. But these have gone from 0% to 1.25% in just a few months, including the largest increase in the institution's history, with the recent rise of 0.75%.
This rise in interest rates is dramatic for many companies and individuals, because if we add to a historic double-digit inflation in Spain, the increase in the cost of debt, we have a perfect storm.
According to the European Central Bank's website , one of its mandates is to keep prices stable . Therefore, when prices in our economy rise too quickly, i.e. when inflation is too high, raising interest rates helps inflation return to the 2% target over the medium term.
The European Central Bank is therefore raising interest rates to send the message that it will not allow inflation to remain above 2%. This is to help keep expectations under control.
3) How can companies prepare to combat inflation?
If you want to take part in an athletics race and you haven't trained enough, you'll probably come last. If you even make it to the finish line. Even if you work hard in the last few weeks, you'll hardly be able to beat those who have been training for years.
Another similar example would be studying. If you don't study throughout the course, it's very difficult to achieve good results, even if you work hard in the last few weeks before exams.
The same thing happens in the business world. If your company is already doing poorly and hanging by a thread, with the rise in inflation, it is likely that the thread will break and it will end up falling into the abyss.
Some companies are already zombies, kept afloat by measures to support business solvency due to COVID-19 . While others aspire to join this group due to solvency or management problems. These types of companies will aggravate their problems in an inflationary context.
But all is not lost, companies will try to survive and play the terrible game of inflation. It is something similar to the squid game from the popular Korean series. Because, if you fail in your calculations, you can end up dead or, as applies in this case, closing your company.
4) Tips for surviving in an inflationary environment
You don't have time to waste if you want to win the battle against inflation. Take note of some tips that we leave you here to survive in an inflationary environment:
If you have liquidity , use it to improve your production processes and your efficiency .
If you have variable rate debts, try to convert them to fixed rate or cancel them , since interest rates are rising. You should try to improve your debt ratio .
If you see that your business was already going through difficulties and that the situation of your business is deteriorating rapidly, sometimes it is better to liquidate the business in an orderly manner than to aggravate the situation of the company and even personnel by trying to keep it afloat against all odds.
