Many of us are living through the ‘cost of living’ crisis. This term refers to the fall in ‘real’ disposable income, adjusted for inflation and after taxes and benefits. Simply put, it means less money available for people to spend or save.
What are the causes of this situation and how does it impact companies and consumers? The answers to these questions can help your business strategy and to plan ahead – for example, whether consumers can absorb price increases, or whether you need to focus more on basic offers. Read on!
Causes of the Cost of Living Crisis
After a long period of low inflation, economies, companies, and consumers worldwide are again struggling to cope with higher prices and the rising cost of living. Experts generally agree that the crisis started in late 2021, and there are various reasons.
Global events
There certainly have been some significant global events in recent times. Here’s how these incidents have led to the economic crisis.
Covid-19
In addition to having a negative effect on people’s physical and mental wellbeing, the pandemic has also caused significant disruption to the economy. Spending was put on hold by lockdowns, which had a knock-on effect for businesses.
Revenues tumbled, companies paused investments and laid off employees. After lockdowns were lifted, everyone rushed to spend the money they had saved. This put pressure on supply chains, which could not keep up with demand, and prices went up.
Supply Chain Issues
Almost three years into the pandemic, the hangover from Covid-19 still lingers in the global supply chain. The increase in consumer demand led to material shortages and packaging on a scale which businesses hadn’t predicted.
Moreover, staff layoffs caused delivery delays, with smaller workforces struggling to clear the backlog. When things finally got moving, new import and export rules resulted in further hold ups at the border.
Russia-Ukraine War
Just as the global economy was starting to recover, the war in Ukraine began, creating a lot of new issues. Widespread condemnation of Russia’s invasion led to many businesses ceasing operations in the region.
With Russia being a major supplier of European gas, and Ukraine exporting much of the continent’s grain and sunflower oil, the prices of food and fuel have skyrocketed.
Economic Factors
The global events across Europe and the world have led to economic changes that have resulted in the crisis.
Inflation
We talk about inflation when there is an increase in the price of goods and services in an economy. This means that people’s money cannot stretch as far as it did before.
Current inflation rates are a result of demand-pull inflation (due to excess consumer demand after Covid-19) and cost-push inflation (due to rising supplier costs because of shortages).
Household budgets are also suffering because of the increase in the energy prices thanks to the soaring wholesale prices of fuel. This situation is likely to get worse, as further hikes are expected in spring 2023.
Wage Increases
Unfortunately, unlike inflation, wages aren’t growing at a faster rate. For example, wages growth in England in 2022 is estimated at 4.75%, while the inflation rate is almost double that.
Productivity
The term “productivity” refers to how effectively an organisation turns its resources into useful outputs. It boosts a country’s economy without the need for additional labour, material, or investment.
Productivity is driven by better equipment and software for workers as well as by a solid national infrastructure: training programmes, provisions for start-ups, and stable government policies.
Improving Trade Flows
Trade flow is flow of imports and exports, their components and direction. Analysing trade flow can help to examine the pattern of trade, trend of flow, concentration or the extent of diversification, and improvements required in certain areas, value and supply chains,
markets and trade, with considerable gains from even partial reform.
What Can Be Done?
There are several things’ companies can do to improve trade flows:
- They need to make their supply chains flexible and resilient in order to adapt and adjust in real-time to changes in international trade flows, new regulations, disruptions (e.g. COVID-19), climate change, trade tensions and other geopolitical movements.
- They need to effectively utilise technology to help reduce operating costs, provide end-to-end supply chain visibility, and unlock localised customer experience internationally.
- They must be capable of adapting to digital operations and driving actionable improvements from data.
- International logistics networks should respond to increasing customer requirements, such as end-to-end order tracking and in-flight delivery changes.
- Collaboration and supplier partnerships can effectively manage cross-border complexity through the use of specialist software and expertise.
Capability to adapt to digital operations and drive actionable improvements from data is important.
International logistics networks should be responsive to increasing customer requirements, such as end-to-end order tracking and in-flight delivery changes.
Collaboration and supplier partnerships are an effective way to manage cross-border complexity through the use of specialist software and expertise.
Takeaway
The cost-of-living crisis is currently the dominating theme of the international scene. Understanding the international trade issues surrounding this can benefit your business. It can help to determine comparative advantage through opportunity cost, identify incentives and predict resulting behaviour, and use supply and demand analysis of specific labour markets and resource markets.
ITnnov offers an all-in-one solution for entering the UK market. We can assist you with market research, logistics, brand positioning and wholesale in the UK market. For more information, feel free to contact us at info@itnnov.com.
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Sources:
https://www.instituteforgovernment.org.uk/explainers/cost-living-crisis
https://www.weforum.org/agenda/2022/09/cost-of-living-crisis-global-impact/