Lesson 6 of 7 · 15 min
Forecasting sales and costs under inflation and deflation
Under inflation or deflation, revenue depends on how far and how fast a company can change its prices and what that does to volume, while costs depend on each input's share of the cost base and the company's ability to substitute, hedge or become more efficient.
In short
- Revenue = volume × price. Whether inflation helps revenue depends on price elasticity of demand: inelastic demand lets revenue rise with prices; elastic demand (elasticity > 1) can make revenue fall even as prices rise.
- Industry structure determines pass-through: concentrated producers selling to fragmented customers pass inflation on; producers facing concentrated retailers struggle to.
- Timing: under inflation, raising prices too late squeezes margins but too soon loses volume; under deflation, cutting too soon lowers gross margin but too late loses volume.
- For international companies, weight pricing by the geographic mix; high inflation in an export market usually leads to currency depreciation that can wipe out the pricing gain.
- Costs: segment by category and geography; long-term contracts and hedges delay input price changes; substitution, vertical integration and efficiency can offset them. The impact depends on each input's share of sales.
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