Talk of Inflation

Posted on: July 13th, 2021

Talk of inflation is dominating the news, and with good reason. Toward the end of 2020, Bill Dudley, the former president of the Federal Reserve Bank of New York warned of the danger of significant monetary inflation, something not seen in the United States for nearly 40 years.  With statements like that, it’s understandable that talk of inflation would come to the fore.

Seth Morgan, MLA Founder, and CEO, was recently featured on the Jimmy Barret Show to talk about inflation and the impact on small businesses.  Seth’s segment begins at minute 48:27.

MLA understands business, and we can help you prepare for the effects of inflation, and other challenges in the economy.  Contact us to learn more.

 Factors Contributing to Inflation

Inflation, while often simply referring to rising prices, can be difficult to define.  In these articles, we will look at three of the main causes of inflation we are experiencing now.  And we will suggest what business owners can do in response.

Many of the factors that have contributed to inflation in the past are present in the economy today.  The first of these is low interest rates:

• Prior to 2000, the Fed generally kept its key rate at or above 5%, but since the economic effect of 9/11, that rate has only been at 5% for a brief period, leading into 2008.
• After the 2008 financial crisis, the Fed lowered interest rates to almost zero, beginning to climb slowly in 2016.
• The Fed again lowered rates at the beginning of the COVID-19 pandemic.

Interest rates may seem somewhat removed from the decisions you make in your business every day.  But the effect on the economy should not be underestimated.  Changing the key interbank rate is one of the main tools the Federal Reserve has in order to combat inflation. That explains why there has been talk of changing interest rates consistently over the past few weeks.

Interest rates affect the cost of borrowing money for you, your customers, and your suppliers.  The best defense against rising rates is managing cash reserves.

• When interest rates are this low, they will only go up; making money becomes scarcer and more expensive to borrow. This means the money you already have becomes more valuable to your organization.
• A long period of rising Inflation does mean that the cash you are holding will have less purchasing power down the road, so holding large cash reserves is not ideal. However, no cash reserves give you limited flexibility when you need to respond to factors beyond your control.

Talk of Inflation

The best course of action is to plan to have enough cash on hand, but also to factor in the cost of access to money.  This could include using existing lines of credit but make sure you understand what will happen to those interest rates when overall rates eventually rise.

MLA can help you manage your cash. We have decades of experience in managing bank relationships, finding our clients more favorable sources of credit, and other aspects of cash management. Contact us to learn more.