What does inflation look like in a healthy economy? A McKinsey Explainer

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TODAY'S NEWS. TOMORROW'S INSIGHTS. A daily newsletter from McKinsey & Company   Edited by Belinda Yu   Editor, Atlanta All about inflation In the news • Still renting. For some Americans, the dream of homeownership is slipping further away. The interest rate on a 30-year fixed mortgage reached 6.02% in September, the highest since 2008 and more than double the rate home buyers were paying one year ago. In an effort to clamp down on inflation, central banks around the world have raised borrowing costs for businesses and consumers. The prospect of owing hundreds of dollars more on monthly mortgage payments has convinced many potential buyers to keep on renting. [WSJ] • Holiday spending to slow. Consumers feeling the pinch of inflation will likely be doing less online shopping over the holiday season and will also cut spending on alcohol, decorations, and trips. This year, online orders in the US are predicted to drop 5% below 2021 levels, while global e-commerce transactions may decline by 7%. For retailers counting on end-of-year sales to lift revenue, that's unwelcome news. But because of higher prices, online sales are forecast to remain flat in November and December, in spite of dropping demand. [Bloomberg] Many companies must strike a balance between raising prices to make up for cost increases while ensuring that they don't rise so much that it suppresses demand. On McKinsey.com • The cost of coffee. In 1970, a quarter could buy you a cup of coffee. That same cup cost an average of $1.59 in 2019. That's inflation: a broad rise in the prices of goods and services across the economy over time. Inflation can have positive effects when it's within range (around two percentage points in a healthy economy). It can stimulate spending, which helps boost demand and productivity. But when inflation is too high, it can mean that the economy is struggling. Consumers and companies lose purchasing power when prices rise. • Avoiding sticker shock. When inflation occurs, companies usually pay more for inputs used in production, such as raw materials like coal and crude oil and intermediate products like flour and steel. To offset inflation, companies often raise the prices of their products or services. But if these increases aren't done thoughtfully, they can alienate customers and depress sales, say McKinsey's Alex Abdelnour, Emily Reasor, and colleagues. See our new McKinsey Explainer for five steps companies can take to smartly recover the cost of inflation. Learn about inflation Was this forwarded to you? Sign up here. Or send us feedback— we'd love to hear from you. Follow our thinking This email contains information about McKinsey's research, insights, services, or events. By opening our emails or clicking on links, you agree to our use of cookies and web tracking technology. For more information on how we use and protect your information, please review our privacy policy. You received this email because you subscribed to the On Point newsletter. Manage subscriptions | Unsubscribe Copyright © 2022 | McKinsey & Company, 3 World Trade Center, 175 Greenwich Street, New York, NY 10007