This Recession Will Make Prices Go UP, (not down)

  • May 23, 2022
  • 4 min read

In the wake of insightful comments and questions from our viewers, a recurring theme emerges — the impact of a recession on prices. As we traverse through a series of inflationary events over the past 12 to 18 months, the quest for the trigger that will lower prices becomes a central focus. Will a recession lead to reduced demand, thus lowering prices? In theory, the interplay of supply and demand should bring about this change, but as we delve into the complexities of our current economic landscape, the answer may not be as straightforward.

The Illusion of Lower Prices in a Recession

While conventional economic wisdom suggests that lower demand should naturally lead to lower prices, the unique circumstances of our current environment present a different reality. The recent inflationary surge, affecting everything from gasoline and insurance to real estate, rents, and groceries, prompts a closer examination of the relationship between demand, volume, and prices.

Understanding the Nuances of Inflation and Prices

Before dissecting the dynamics at play, it’s crucial to distinguish between inflation and prices. The inflation rate, denoted as a percentage, signifies the annual increase in prices compared to the previous year. When the inflation rate is high, prices rise more rapidly, and when it approaches zero, prices stabilize at their current levels. However, even if inflation decreases, it doesn’t necessarily translate to a reduction in prices.

Unraveling the Economic Perfect Storm

In the current economic perfect storm, characterized by both inflation and the looming threat of a recession, the traditional expectations may not hold. While inflation rates might decrease, prices are unlikely to follow suit. Here’s why:

Fixed Expenses and the Cost of Doing Business

For businesses, especially in the construction industry, fixed expenses remain a constant. These include rent, insurance, taxes, utilities, and salaries. Even if demand decreases, these fixed expenses persist. In fact, they might increase due to rising real estate values, higher tax rates, and additional administrative costs.

The Volume-Price Conundrum

Contrary to the expectation of lower prices with reduced demand, a decrease in volume can lead to an increase in prices. The economic principle of high volume resulting in lower prices is reversed when businesses face a lower volume of projects. Builders, contractors, and even retailers find themselves compelled to raise prices to cover their fixed expenses, which are now spread over fewer projects.

Economic Strategies for Navigating Change

While economic challenges pose difficulties, astute business operators can leverage these circumstances to their advantage. Efficiency, automation, and strategic planning can help mitigate the impact of lower volumes without compromising quality.

Municipal Budgets Under Pressure

Just as businesses feel the strain, municipal budgets will also face challenges. Lower revenue from sales and payroll taxes, coupled with inflation, will create a fiscal squeeze for governmental agencies.

Looking Ahead: Navigating the Economic Milestone

As we navigate this economic milestone — a blend of inflation and recession — understanding the economic math behind pricing becomes crucial. Lower volume does not necessarily equate to lower prices, and businesses, municipalities, and consumers must adapt to this economic reality.

Join the Conversation

We appreciate the thoughtful questions and comments from our viewers. Keep the dialogue going by sharing your thoughts on these economic intricacies. Stay tuned for future videos where we’ll delve into strategies for businesses to thrive in challenging economic environments.

In the next week, we’ll provide you with a helpful calculator for estimating construction costs, allowing you to navigate the complexities of pricing in the construction industry. Until then, stay informed, ask questions, and let’s navigate these economic waters together. See you in the next video!

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