Pandemic, inflation, and how to keep your business profitable

September 02, 2022
Pandemic, inflation, and how to keep your business profitable

By Gustavo Vélez, Economist

The COVID-19 pandemic brought great social, economic, and labor disruptions. This new economic environment requires entrepreneurs to take drastic and creative measures for their businesses to continue being profitable.

Since March 2020 —when we had to lock down to protect ourselves from the new virus—the economies of the United States and Puerto Rico entered uncharted waters; we began to live through processes never seen before. As a result of that forced confinement, the federal and local governments sent financial aid to companies and households to prevent a collapse of the economic-financial system.

Direct help had to be provided to millions of people who, temporarily, did not have access to work. It was necessary to help industries and companies that were paralyzed. The stimulus programs began flowing as soon as it was understood that the closing of the economy would go on for a while.

In April 2020, the federal government launched the first round of stimuli, known as the Cares Act, which consisted of $2 trillion in checks that went directly to people. One of the most relevant programs was the Pandemic Unemployment Assistance (PUA) for the unemployed. In Puerto Rico, PUA beneficiaries received close to $10 billion in aid.

What caused the inflation

The $4 trillion in three rounds of economic stimuli that the federal government injected into the economy between mid-2020 and the first quarter of 2021, while it helped to prevent a collapse, it also created the conditions for the current inflationary levels.

In essence, the pandemic aid injected a mass of money into the system and gave consumers an artificial purchasing power, but production began to contract because many companies were not operating normally. The excess demand for goods and services while supply began to shrink created the conditions for the current imbalance in prices. A historical inflation was generated, the highest in four decades.

Let’s understand what inflation is

As defined, inflation results from a generalized increase in prices over a given period. It is calculated using the Consumer Price Index (CPI) / (IPC by its Spanish acronym), which measures the prices of goods and services in consumers’ basket of goods every month. This basket includes a dozen products, such as food, fuel, clothing, housing, medical and health services, and the main consumption categories.

If prices begin to grow faster than people’s wages and real income, their purchasing power is reduced, and they experience a loss in economic well-being. Quite simply, consumers’ money can buy fewer things.

During the past 14 months, inflation in the United States has grown to levels not seen since 1982. In July, it reached 9.1%, the highest in four decades. Meanwhile, last June in Puerto Rico, inflation was at 6.4%, one of the highest levels in a long time. And that has affected the economic well-being of consumers who are helpless in the face of their purchasing power’s erosion.

The increase in oil prices due to the war in Ukraine and the pressures on the supply chains contributed to exacerbating the current price situation. In categories such as food, inflation has reached double digits, going from 14% to 16%.

That’s why interest goes up

To contain the current inflationary levels, the Federal Reserve Bank has initiated an aggressive rise in interest rates that, although it could curb inflation, at the same time could create a recession. Since March, the benchmark rate has risen four times, with two hikes of .75% in June and July. Thus, the Federal Reserve hopes to put out the inflationary fire gradually and we should see favorable results by the end of 2022.

Tips to mitigate the effects of inflation on your business

Today’s inflationary challenges require entrepreneurs to take drastic and creative measures to stay profitable —and avoid having their businesses affected by this new economic environment.

What can you do:

  1. Review your expense structure and look for areas where you can make adjustments without affecting operational capacity. Review your Profit and Loss Statement considering the new reality and develop various income and expense scenarios to deal with the current volatility.
  2. Use technology to implement operational efficiencies and increase productivity.
  3. Implement metrics and measurement systems to have an overall view of the company’s various areas.
  4. If your business is electricity-intensive, you may consider incorporating renewable energy systems to lower costs. The cost of electricity is expected to remain relatively high in the short and medium term due to the Puerto Rico Electric Power Authority’s debt restructuring.

Lastly, try to keep your management aligned with the workforce. Remember that, in challenging times, keeping a workforce motivated and focused on business goals is an important organizational asset.

Gustavo Velez Pizarro graduated Magna Cum Laude from the University of Puerto Rico’s Rio Piedras Campus with both a bachelor’s degree and master’s degree in Economics. He began his tenure as an economist in the municipality of San Juan and in government agencies such as Puerto Rico’s Planning Board. He later served as an economic consultant to the Legislature and then economic advisor at La Fortaleza.

Founder of Inteligencia Economica, a firm that has grown into the island’s first economic data-analysis-driven firm. Inteligencia Economica has consulted for local and international businesses on topics such as public policy, feasibility studies, and more. With over 20 years of experience in economic analysis, the firm integrates over 6,000 economic indicators into our data-driven analysis for our clients around the world.

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