With inflation at the highest levels in 40 years, the high cost of living and the rising price of goods have become top concerns for individuals, firms and economies.
For some firms, inflation is the result of an increase in demand that can originate from reasons that affect all firms, such as increases in the money supply or supply-chain bottlenecks (like during COVID and in the aftermath), or from firm-specific reasons, like a shift in consumers’ tastes.
When firms see an increase in demand for their products, they often interpret it as a signal of higher sustained future demand, and therefore decide to increase investments and expand production capacity. But Elia Ferracuti, an assistant professor of accounting at Duke’s Fuqua School of Business, says that in the presence of inflation this could amount to a misinterpretation of the signals that would lead to an inefficient use of the company’s resources.
[This article has been reproduced with permission from Duke University's Fuqua School of Business. This piece originally appeared on Duke Fuqua Insights]