Cost-push Inflation: Making Adjustments, Maintaining ProfitabilityJun 15, 2021
You look at your financial documents and see that the sales of your products are steady. Business is good. You’re happy. But you’re met with bad news: the cost of the raw materials used to make your products have increased in value. Now, you are faced with a difficult decision and that is to raise the selling price of your products.
The situation mentioned above is what we call cost-push inflation. The most common cause of cost-push inflation starts with an increase in the cost of production, may it be expected or unexpected. For example, the cost of raw materials or inventory used in the production of products might increase, thus, leading to higher-end costs. Other common causes of cost-push inflation are:
- Increased labour costs. When there is an increase in mandatory wage for production employees, there is an increase in labour costs. In effect, there is an increase in the product’s cost of production.
- Unexpected causes of cost-push inflation. While most can be expected, there are unexpected causes of cost-push inflation like natural disasters; such as floods, earthquakes, fires, or tornadoes. If a natural disaster is large enough that it damages the production facility of your business, or even results in the shutdown or partial disruption of the production chain, higher costs of production are likely to follow. Your company might have no choice but to increase your sales price to help recoup some of the losses due to the disaster that occurred.
- Sudden change in government and politics. A sudden change in the government and politics can affect the country’s ability to maintain its previous output.
- Government regulations and changes in current laws. While government regulations and changes in current laws can usually be anticipated, it may still cause the costs of production to rise for businesses because you will not have any way to compensate for the increased costs associated with them as it is beyond your control.
For this kind of inflation to take place, the demand for the product must remain constant during the time that changes in the cost of production are occurring. To compensate for the increase of the production costs, businesses usually raise sales prices of their products to the consumer to maintain the profit levels while still keeping pace with expected demand.
When you are already running at full production capacity, it is understandable that you need to increase your sales price because of cost-push inflation. This is because it is difficult to maintain your profit margins by producing the same amount of goods and services when your cost of production is higher and your productivity is maximized.
Do you need any help as regards your sales prices? Here at Stream Accounting, we can present you the best practices that can help you and your company maintain your profitability. Talk to us now about cost-push inflation concerns!
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