Digital Strategy, Global Insights, Leadership

Inflation – Predicting the Winners

12 Nov , 2021  

The recent report of the Consumer Price Index topping 6.2% has sent shiver of inflation fears into the market. However, this inflationary hit seems different than the inflation seen in recent episodes of high inflation. Examining this will help us determine who are the winners and losers of the current inflation spike.

How is the Current Inflationary Spike Different than Other Inflationary Spikes?

This Inflation Spike is Rapid and Severe

We went from basically no inflation to 6.2% annual inflation, as per the CPI, in less than a year. Look at the history of inflation since WWII in the following graphic (data from the US Federal Reserve of St. Louis).

A change in inflation of about 6% is on par with the changes seen in the worst of years from the 1970s. So, we are seeing a severe INCREASE in inflation. The Federal Reserve has more or less focused on controlling inflation for the last 30-40 years. Now, it is has the largest increase since the 1970s.

Inflation is Up and Unemployment is Falling

In every macro-economic class taught before 2020, one heard that inflation and unemployment were mysteriously correlated, as empirically noted. This is of course the famous Phillips curve, which says inflation in wages is inversely related to unemployment. In theory it makes sense. In reality, the US has had periods of relatively high unemployment and high inflation in the 1970s and 1980s which has suggested an economy can have high prices and high unemployment (perhaps for monetary policy reasons and social spending effects).

With a falling unemployment, it will suggest that employers will have to bid up wages even more so to attract workers, leading to higher labor prices and higher product prices, which is the symptom of inflation.

We all see the shortage of workers in nearly every sector. Now consider that all of those sectors will be paying more for labor and selling things at a higher price. On top of that, we have data that shows over 2 millions Americans have taken early retirement post COVID. The labor market will be competitive for some time.

Who can benefit from this?

1. Firms than Can Scale Revenue without Additional Labor: Think of a business that can grow revenue without growing labor. This is hard for many service firms, because service scales with labor directly. But software, technology, an many e-commerce firms can scale revenue without the same scale in labor expenses. This should prove bullish for firms like Amazon, Microsoft, Facebook, Salesforce, and the like. Some, but not all manufacturing. If a firm can do more without adding new workers, that is a winner. It is almost impossible once you have to move or touch anything. Digital work can scale. Physical work – not so much.

2. Low-cost providers: Think of firms that have distinct pricing advantages. In an economy with rising prices, it is reasonable for customers to shop for deals. This is product dependent. We will all need food, energy, and health care. Price leaders in those categories are positioned to at least out perform their categories. Even though quick serve restaurants will battle for labor, I expect they will do well as more people look to economize on food and meal purchases.

3. Deflation Makers: A special kind of low-cost provider is what I call a deflation maker. They have innovation, technology, or other advantages that allow them to dramatically reduce the cost of providing a product or service. I think of digital disruption in this sphere. Netflix did this to watching a movie. Online media, in general, has killed newspapers, magazines, and a host of other publications. The consumer still gets the product, but the digital form is way cheaper. Could we be on the cusp of such digital disruption in healthcare? No visiting a doctor, just use a digital device to sent in stats to an AI to provide a health report. It would be way cheaper. Expect a great investment in deflation makers – firms turning to automation, self service kiosks, cloud services, AI and other automatic decision aides. Such technologies remove large amounts of labor and can dramatically lower product and service prices, which is a huge advantage to gaining market share in this economy. Again, Amazon appears to be a great winner here. In their recent financial report, they reported a huge investment in technologies to enable growth and control cost. The advantages that such investment will bring will prove even more valuable in the inflationary economy.

Get ready for more self checkouts, more natural language processing, more algorithms, and less people in your products and services.

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About Russell Walker, Ph.D.

Professor Russell Walker helps companies develop strategies to manage risk and harness value through analytics and Big Data. He is Associate Teaching Professor of Marketing at the Foster School of Business of the University of Washington. He has worked with many leading analytical organizations through the Analytics Consulting Lab, an experiential class that he founded and leads at Foster.

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Russell Walker helps companies develop strategies to manage risk and harness value through analytics and big data. He has done novel research in data monetization and digital disruption and advises leading firms on these topics. As Director of Experiential Learning in Analytics and Associate Teaching Professor of Marketing and International Business at the Foster School of Business, at the University of Washington, Dr. Walker is an academic thought-leader on analytics. Russell Walker has developed and taught leading executive programs on Big Data and Analytics, Strategic Data-Driven Marketing, Enterprise Risk, Operational Risk, and Global Leadership. Previous to moving to Seattle and the Foster School, Dr. Walker was Clinical Professor at the Kellogg School of Management of Northwestern University, where he founded and taught many popular courses in analytics and risk management. His is the author of the book From Big Data to Big Profits: Success with Data and Analytics (Oxford University Press, 2015) which examines data monetization strategies and the development of data-centric business models in the new digital economy. He is also the author of the award-winning text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management as a competitive advantage. Dr. Walker consults with firms on the topics of Big Data and Analytics, Data Monetization, Risk Management, and Business Strategy. Russell Walker can be reached at: @RussWalker1776

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