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Your Business Expense Projections are Wrong

It's that time of year when we all start to think about next year. As you run budgets and projections for your business, rather than assuming a return to the GFC-to-pandemic period of 2% inflation and stable cost environment, consider scenarios with a higher average level of inflation (3-4%) and more volatile inflation. No doubt your costs were up meaningfully over the last 2-3 years and we suggest your base case assumption should be that it stays that way.

Per our last post: increasing government debt levels are likely to impede future real GDP growth (in other words, today's new debt is tomorrow's burden) which might dampen inflation, and productivity enhancers like robotics and AI may prove disinflationary. But - it is possible for low real growth and higher inflation (i.e., stagflation) to coexist, and we are concerned that the last 3-4 decades of globalization and increasing supply of labor and materials put downward pressure on inflation and interest rates and allowed for unconstrained government debt growth. We are in a different era now, with constrained labor supply growth, regionalization ("reshoring," "friendshoring," etc.), electrification, decarbonization, etc. – factors that should all be inflationary.

Re labor supply, Mauldin Economics had this to say over the summer:

"That’s why the employers who assume the labor shortage will end are wrong. The idle workers whom they think will be clamoring for jobs don’t actually exist, and no more are coming."(1)

Re technology, for a long time we all experienced technology as disinflationary - the cost of software per user went down over time. But recently that has not been true! We have seen the cost of software per user increase by 15-20% over the last two years in some cases. Software often has high switching costs and software vendors have been using that leverage to increase prices, perhaps due to their own labor cost issues. In this context, AI tools become critical productivity enhancers, not a nice-to-have luxury.

Recession in 2024 or not - the cost growth picture has changed and we all need to adapt.



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