Beyond the CPI: Why ‘Multinflation’ is the New Reality for Businesses
For decades, businesses have relied on the Consumer Price Index (CPI) as a benchmark for economic forecasting and strategic planning. But a growing disconnect between official inflation figures and the lived experience of rising costs is forcing a reckoning. A staggering 85% of CFOs surveyed in late 2023 reported experiencing inflation rates significantly higher than publicly reported CPI numbers, according to a recent Deloitte study. This isn’t just a matter of perception; it’s a fundamental flaw in relying on averages, and it’s giving rise to a new, crucial concept: multinflation.
The Problem with Averages: Why CPI Falls Short
The core issue lies in the CPI’s very nature. It’s an average, and averages obscure critical variations. As the saying goes, averaging the incomes of Bill Gates and someone earning minimum wage doesn’t reflect the economic reality for either individual. Similarly, a national CPI of 3% masks the fact that certain sectors – and even individual businesses – may be experiencing inflation rates of 7%, 10%, or even higher. This dispersion is particularly dangerous because basing pricing strategies, investment decisions, or cost controls on a misleading average is a recipe for eroding margins and lost competitiveness.
Traditional Inflation Measures: Limited in Today’s World
Existing frameworks for understanding high inflation have limitations. Philip Cagan’s 1956 definition of hyperinflation – a monthly price increase exceeding 50% – is a useful indicator of economic collapse, but it’s largely irrelevant for navigating the more subtle, yet equally damaging, inflationary pressures of today. Similarly, International Accounting Standard (IAS) 29 provides a reactive approach, adjusting financial statements after inflation has taken hold. While crucial for historical reporting, it offers little proactive guidance for businesses facing immediate cost pressures.
Multinflation: A Managerial Construct for a Complex Reality
Introduced in 2016 by Management Consultant Pedro Pacheco Rodríguez, multinflation isn’t a new macroeconomic theory, but a pragmatic managerial tool. It acknowledges that inflation isn’t a uniform phenomenon; it’s a mosaic of varying rates impacting different sectors, companies, and even individual product lines. Multinflation compels businesses to move beyond relying solely on national averages and instead calculate their own inflation rates, reflecting their specific cost structures and market dynamics.
Sectoral Volatility: A Concrete Example
Consider a hypothetical European economy with a 3% CPI. A superficial glance might suggest modest inflationary pressures. However, a deeper dive reveals a vastly different picture:
- Dwelling (Rent/Construction): 7.4% inflation (following a -5.9% deflation the previous year) – squeezing margins for businesses with high rental costs.
- Food & Drinks: 1.8% inflation – potentially leading supermarkets to miscalculate pricing strategies.
- Transport: 0.6% inflation – creating a competitive advantage for logistics companies.
- Communications: 0.1% inflation – compressing margins as costs (like rent) rise while sales prices remain stagnant.
This sectoral volatility demonstrates why a single CPI figure can be dangerously misleading.
From Good Practice to Survival: The Venezuelan Experience
In economies experiencing extreme inflation, like Venezuela, multinflation isn’t merely a best practice – it’s a matter of survival. Businesses that fail to accurately assess their own inflation rates are quickly priced out of the market. The critical question shifts from “What will the CPI be this year?” to “What is my internal inflation rate, and how will it impact my decisions?”
Implementing a Multinflation Approach: A Three-Step Guide
- Calculate Your Own Price Index: Meticulously track the price evolution of critical supplies – raw materials, logistics, energy, salaries, and rentals – at the business unit level.
- Adapt Talent & Technology: Invest in training for management teams to analyze divergent data and leverage Big Data analytics tools for real-time insights. Proactive analysis is key.
- Strategic Decision-Making: Use your internal inflation rate to inform pricing, budgeting, cost control, and salary negotiations. Combine this with macroeconomic projections for a comprehensive view.
The Future of Inflation Management
As global economic conditions continue to evolve, the limitations of traditional inflation measures will become increasingly apparent. The rise of supply chain disruptions, geopolitical instability, and sector-specific shocks will exacerbate the discrepancies between national averages and the realities faced by individual businesses. Multinflation isn’t a replacement for traditional economic indicators, but a vital complement – a strategic navigation manual for navigating the complexities of the modern inflationary landscape. The companies that embrace this approach will be best positioned to protect their margins, maintain competitiveness, and thrive in an uncertain future.
What strategies are you implementing to address the discrepancies between official inflation data and your company’s actual cost increases? Share your insights in the comments below!
