It has been a number of decades since the word “inflation” has been used in a manager’s vocabulary. The combination of global government stimulus, representing nearly 14 percent of the approximately $84 trillion world economy, coupled with accommodative monetary policy in the U.S. and abroad has established the foundation for inflation. Throw in a few supply chain disruptions creating shortages; grid threats, such as the ransomware attack on the East Coast pipeline; and a shortage of workers, and inflation quickly becomes a variable one must manage. The possibility of the federal minimum wage being raised to $15 per hour and generous stimulus and unemployment checks are like a wildfire roaring through the economy and businesses, impacting the cost of labor at all levels. The question becomes, will inflation be temporary, or will certain components become permanent? As business owners and lenders, close surveillance of key economic indicators throughout the summer will be a high priority.

The inflation rate for the basket of goods representing commodities (corn, soybeans, wheat, livestock, fuel, fertilizer, building supplies, and equipment) is increasing by double-digits. Will these high prices cure high prices in the supply and demand balance? Closely watch production and supply intentions in Eastern Europe this summer followed by planting intentions in South America next fall and winter.

Moving to the global outlook, analyze the direction of copper prices, commonly known as “Dr. Copper.” Copper prices have doubled over the past year and are a foreteller of global growth possibilities.

When one examines the strength of inflation, maintain a close watch on the Index of Consumer Sentiment, published by the University of Michigan. If this number is above 90, it indicates a confident consumer. If this is the case, expect more permanent inflation for the next six months as citizens in the U.S. and abroad spend stimulus checks and savings.

Of course, a reemergence of the COVID-19 pandemic or another disruptor would send economic behavioral shock waves and could temper inflation. One also must watch asset bubbles in the stock market, cryptocurrencies, and residential real estate. The combination of a bust in one or all of these areas could quickly stamp out inflationary pressures.

It is understandable if one feels that all of the aforementioned variables are out of your control. However, as a veteran of many economic cycles, including the hyperinflation of the 1970s, the following are time tested tools and perspectives to regain control of the uncontrollable variables.

In an inflating economic environment, one must carefully monitor finances more than once a year. A monthly or quarterly cash flow statement can be effective in determining margins due to fluctuating prices and costs. Utilize spreadsheets to develop various financial production and marketing scenarios to gauge outcomes and prevent you from swerving into the financial ditch.

Cash flow statements can be especially useful in determining cost of production by enterprise. With escalating costs such as feed, fertilizer, equipment, repairs, and labor, updating your cost of production is critical to effectively execute a marketing and risk management plan. Prices received and costs will be a moving target and the cash flow statement can bring objectivity to an emotionally charged operating environment.

If you are embarking on an expansion that requires construction materials and equipment, budget 25 percent more time and costs due to supply chain and material disruptions. Expect more frustration at critical planting and harvesting times as a result of parts and components not being available.

Inflating costs and expenses may impact working capital lines. Build in possible increases in lines of credit due to escalating expenses. A recent visit with a producer indicated that he quickly utilized his lines of credit as a result of escalating crop and feed costs on his livestock enterprise. For those that are hiring labor or negotiating rents and leases, expectations concerning compensation will be different.

Finally, your household and family living budgets will need to be updated. The cost of transportation, childcare, and medical costs will most likely increase at least 5 to 10 percent. All these factors combine to create a snowball effect under the term inflation.

Going forward, increases in local, state, and federal taxes will need to be considered. A preplanned, generic formula for family living costs will no longer suffice in managing living withdrawals from your cash income. Inflation intensifies the management of margins and accelerates the speed of change as one attempts to stay on the positive side of the financial ledger.