Stagflation is a condition in which overall prices are rising even though economic activity has stopped, but many people may be unfamiliar with the term. However, even if we are not familiar with this issue, we need to consider it as a very big issue that cannot be ignored in our daily lives and business settings.
This article provides an overview of stagflation, explains inflation-deflation related to stagflation, and explains why stagflation occurs. We will also introduce countermeasures against stagflation from a marketing perspective, so please use this as a reference.
What is stagflation?
First, let’s take a look at an overview of stagflation. Stagflation is a term that refers to economic stagnation, economic cessation, and rising prices. The word stagflation is a combination of two words: stagnation and inflation.
Simply put, stagflation is a situation in which overall prices are rising even though economic activity has stopped. Of course, this is the worst situation in the economy. From a consumer’s point of view, prices are rising even though their income and money in hand are not increasing, so they are forced to raise their living costs. If this happens, you may not be able to save enough money or you may find yourself in a difficult situation.
Furthermore, as stagflation continues, prices rise and demand declines. In other words, it becomes difficult not only for consumers but also for businesses to share products. For these reasons, stagflation is characterized by being regarded as the worst economic situation.
What is inflation?
To better understand stagflation, you should also know about inflation. Inflation is a situation where prices are rising and the value of the currency is falling. Inflation occurs when demand exceeds supply.
From a company’s perspective, demand is higher than supply, so they sell their products at a higher price than they originally offered. Inflation can be said to be a very good economic condition, as companies have ample funds and consumers’ purchasing activities become active.
What is deflation?
In contrast to the inflation that I explained earlier, deflation is a bad economic condition. Although the value of goods continues to fall, the value of the currency increases, so consumer purchasing activities gradually come to a halt. From a company’s point of view, their products are not selling well, their business performance is deteriorating, and wages are not increasing.
So, what companies should do to counter this is to lower the price of their products and sell them. However, this results in a negative spiral as the company has to sell at a worse profit rate than it should and there is no source of investment for new business.
When stagflation occurs, investor sentiment cools down.
Stagflation, as mentioned above, is the worst economic situation. When stagflation occurs, investor sentiment also cools. Even though economic activity has stopped, prices continue to rise, so investors are not willing to invest.
When you hear the word investment, you may think of it as a way for individuals to increase their funds. For this reason, many people think that even if investor sentiment cools, there will generally be no major problems.
However, if we take a listed company as an example, simply put, a listed company makes its shares available to the public, allowing anyone to purchase their shares. From an investor’s point of view, a rise in stock prices means an increase in their own assets, while from a company’s point of view, it leads to an increase in the value of the company.
In other words, when stagflation occurs and investor sentiment cools, the above-mentioned investment activities will not take place, and the activities of companies that support the economy will decline. Against this background, stagflation is characterized by great fear.
Why does stagflation occur?
So far, we have explained stagflation, but why does stagflation occur? In conclusion, the biggest cause of stagflation is lack of supply. When the economy is good, demand is high, and products and services related to these are sought after. However, if the supply of those services cannot keep up, a state of stagflation will gradually develop.
Also, the above is just an example; stagflation can also occur due to other external factors. For example, the war between Russia and Ukraine that occurred in 2022 was a major factor in the rise in prices of gasoline, crude oil, energy, etc. Naturally, these prices will rise because supplies will no longer be available.
As you can see, supply shortages are a major cause of stagflation.
Past examples of stagflation
In the past, Japan also experienced stagflation. It’s an “oil shock.” To put it simply, an oil shock is an economic shock caused by an increase in the price of crude oil. As a result of the oil shock, GDP, the gross domestic product, also experienced negative growth, and oil shocks occurred from the 1970s to the 1980s.
It is also said that stagflation may occur even in 2022 due to the spread of the new coronavirus and the war between Russia and Ukraine. Some experts suggest that stagflation is extremely likely, so whether you’re a business or a consumer, you need to take steps to combat it.
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Measures against stagflation from a marketing perspective
So far, we have explained the causes of stagflation and examples of stagflation that have occurred in the past. From here, we will introduce countermeasures against stagflation from a
marketing
perspective.
- Perform management analysis
- Add value to products
- do branding
- Review market selection
- Review sales channels
- Sensing consumer needs
Let’s look at each in turn.
Perform management analysis
First, let’s analyze the current management. In particular, by calculating cash flow and analyzing fixed costs, variable costs, and incoming cash over the next two to three years, you can see what measures and activities your company should take.
If we assume that stagflation occurs, it is easy to imagine that costs will rise if it is a business that requires high costs. On the other hand, incoming cash is also expected to decrease. Based on these considerations, it is a good idea to identify a line in which you can safely continue your business even in a negative simulation, and take measures to do so.
Add value to products
When stagflation occurs, consumer purchasing activity declines. Many companies can only sell their products by cutting prices. However, in this state, it cannot be said that measures against stagflation are being taken. This is because competitors may also adopt a price-cutting strategy, and as a result, profit margins will only worsen.
To prevent these problems, it is important to add value to products. By adding attractive added value other than price, customers are more likely to buy a product that is of the highest quality even if it is expensive, rather than a product that is cheap and has a certain quality.
do branding
Next, branding is also important.
Branding
refers to the actions you take to create your company’s brand. Although this is similar to the added value mentioned above, if your branding is done well, you will be able to get people to buy your company’s products for reasons other than “I buy it because it’s cheap.”
For example, if you take Starbucks, they offer their location as a third place. As a result, not only does the coffee taste delicious, but we are also branding the cafe as a third place, such as “a cafe that is easy to work in” and “a cafe that is easy to talk to.”
Review market selection
One way to do this is to change the markets you compete in before and after stagflation occurs. For example, if you were selling products to wealthy people before stagflation, you might want to expand your range a little to include high-paid office workers as a target.
When stagflation occurs, purchasing behavior declines, so the idea is to increase the number of targets and maintain the overall numbers.
Review sales channels
The spread of the new coronavirus infection is a notable example, and it is true that there has been a difference between companies that have increased their sales
channels
and companies that have not. In the past, it was possible to carry out sales activities face-to-face, but it has become difficult to do so face-to-face, and it has become necessary to conduct sales activities using SNS and Internet advertising.
Similarly, in the face of stagflation, it is also important to build different sales channels.
Sensing consumer needs
Finally, be able to detect consumer
needs
as early as possible. By selling products that meet consumer needs, it becomes easier for consumers to purchase products. Nowadays, the Internet is becoming more and more active, so using social networking services (SNS), it is easy to understand the needs of consumers. If you are not currently working on SNS, it would be a good idea to start posting on SNS as well.
summary
In this article, we have explained about stagflation. Stagflation refers to a situation where prices are rising even though the economy is at a standstill. When stagflation occurs, companies can only sell their products effectively by lowering prices, and consumers’ purchasing activities decline. For this reason, stagflation is said to be the worst economic situation.
In order to take measures against stagflation, it is first necessary to analyze management and revise branding and sales channels. First of all, why not try to take measures that you can do in your own company?