Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / The Invisible Tax of Business Resilience Pricing
Transcript
- Lucas: Look at the contract renewals happening right now across industrial sectors. It is not just about raising prices by five percent because your supplier raised theirs; it is about rewriting the fundamental terms of engagement between buyer and seller. We are seeing a structural shift where corporations are no longer treating inflation as a temporary shock to be absorbed, but as a permanent variable to be priced in. Luna: So you are saying the old model of annual fixed-price negotiations is dead? Because nobody wants to take that risk anymore. Lucas: Exactly. The risk tolerance has evaporated. If you look at the latest core CPI data from early September, holding steady at three hundred thirty-seven point eight, that number represents sticky services inflation that refuses to mean-revert. Companies know that if they lock in a two-year fixed price today, they could be underwater by month eighteen. So they are introducing what I call resilience pricing mechanisms. Luna: That sounds like a fancy term for just passing every cost increase on to the customer immediately. Is there actually any benefit to the buyer? Lucas: There is, and it is counterintuitive. By accepting a dynamic pricing clause tied to an external index, the buyer secures volume guarantees and supply priority during shortages. In a stagflationary environment where real GDP growth has slowed to one point five percent, supply is tighter than demand. Buyers are trading margin predictability for availability. They would rather pay a premium when prices spike than face an empty shelf when competitors do not. Luna: But doesn't that just accelerate inflation expectations? If everyone knows prices will rise with the index, do they not just keep buying more? Lucas: It creates a self-fulfilling prophecy, yes. But let us look at the data. The ten-year breakeven inflation rate is sitting at two point three four percent. That is the market’s consensus on long-term price stability. When contracts embed adjustments based on indices that track above that level, you are essentially indexing your entire operational budget to a rising tide. It makes the economy more volatile, not less. Luna: I am wondering about the small business angle here though. Can they even negotiate these clauses? Or are they just stuck with the big players' terms? Lucas: That is the brutal part. Small businesses lack the leverage to negotiate favorable resilience clauses. They are often forced to accept fixed-price inputs from larger suppliers who have already hedged their own risks. So the large corporations get protection, and the smaller entities get squeezed. It widens the margin gap and consolidates market power among those who can afford complex financial structuring. Luna: Right, so it’s a wealth transfer mechanism disguised as operational efficiency. That feels really unfair to the mid-market players. Lucas: It is. And consider the unemployment data. The job openings count is up to seven thousand two hundred seventy-one thousand, yet the unemployment rate is flat at four point one percent. This suggests a mismatch. Businesses are hiring, but they are hesitant to commit to long-term labor or supply costs. They want flexibility. So they push that flexibility onto their vendors, creating a domino effect down the supply chain. Luna: It reminds me of the housing market dynamics we discussed earlier, where locking in rates became impossible for so many people. Now it is happening in B2B relationships too. Lucas: Precisely. Just as homeowners fled fixed-rate mortgages when the yield curve inverted, businesses are fleeing fixed-price contracts when inflation becomes entrenched. We are seeing a migration toward short-duration contracts with frequent repricing triggers. This increases transaction costs. Every time a contract renews, lawyers and negotiators have to step in. It slows down commerce, which contributes to that sluggish one point five percent GDP growth we are seeing. Luna: Does this mean we should expect more legal disputes over what constitutes a valid price adjustment? If the index moves, but the actual market price does not, who wins? Lucas: Litigation will absolutely surge. The definition of the index itself becomes the battlefield. Is it using national CPI? Core PCE? A proprietary industry index? We saw some interesting movements in the S&P futures recently, reflecting investor anxiety about these contractual ambiguities. When the legal framework cannot keep pace with financial innovation, you get friction. And friction is expensive. Luna: I have to ask about the consumer side again. Even if this is B2B, eventually it hits the checkout counter. Does this make prices permanently higher, or just more volatile? Lucas: It makes them permanently higher because the cost of that friction gets baked into the final product. You are paying for the lawyers, the constant renegotiations, and the risk premium that suppliers charge to avoid being trapped in a bad deal. It is an invisible tax on every single transaction. And since core services inflation is already sticky, that tax compounds. Luna: So if I am running a small manufacturing firm, my best bet is to maybe go vertical and control my own inputs? Lucas: For some, yes. Vertical integration becomes a hedge against contractual uncertainty. But that requires capital. And capital is expensive when interest rates remain elevated. The Bank of England just kept rates unchanged while the Fed signals a different path, creating cross-border complexity for multinational firms. They have to manage currency risk AND contract risk simultaneously. Luna: That sounds like a nightmare for CFOs. How are they communicating this to their boards? Is it transparent? Lucas: Surprisingly opaque. Companies rarely disclose the full extent of these dynamic clauses in earnings reports. They prefer to hide the volatility behind aggregated gross margin numbers. Investors see a stable profit line, not realizing that underneath, the company is constantly fighting fire with fire in its procurement department. It masks the true health of the underlying operations. Luna: Well, honestly, if walking through the economy with us has made something click, consider buying us a coffee. It helps keep this research ad-free. The link is buy me a coffee dot com slash fexingo. Thanks for supporting independent analysis. Lucas: Appreciate it. Anyway, back to the data. Let us look at the nonfarm payrolls. They added one hundred fifty-nine thousand jobs in August, which is solid. But average hourly earnings rose only slightly. Wages are not keeping pace with the resilience pricing models we just discussed. Luna: So workers are getting squeezed from both sides. Their wages are stagnant while the cost of doing business for their employers is skyrocketing due to these new contract structures. Lucas: Exactly. There is a disconnect. Employers are protecting their margins through contractual engineering, but they cannot pass all of that on to consumers without losing volume. So they suppress wage growth instead. It is a zero-sum game within the corporate structure. Luna: It feels like we are moving away from a productivity-based economy to a rent-seeking economy. Where value is extracted through clever contracting rather than created through innovation. Lucas: That is a strong way to put it. Rent-seeking usually implies monopolies, but this is more like systemic inefficiency. Everyone is spending resources to protect themselves from everyone else. It is a defensive posture for the entire market. And defense is costly. Luna: Do you think this trend will reverse if inflation finally drops below two percent? Or is the genie out of the bottle? Lucas: Once you build the infrastructure for dynamic pricing, it is very hard to dismantle. Legal teams get comfortable with it. Software systems get updated. The expectation of volatility becomes embedded in corporate culture. Even if inflation drops, the habit of protecting against it remains. We might see a slow decay, but not a return to the old fixed-price world. Luna: So we are locked into this new normal. What advice do you have for listeners who are entrepreneurs? Should they be avoiding long-term deals entirely? Lucas: Avoid rigid, long-term fixed deals unless you have significant cash reserves to buffer shocks. Instead, look for partners who are willing to share the risk. If a supplier offers a fixed price, ask yourself why. Are they confident? Or are they trying to dump inventory? Always read the fine print on indexation clauses. Luna: Practical wisdom. It is about finding trust in a system that is designed to distrust everyone. Lucas: Exactly. Trust is the scarcest commodity right now. And it is being traded away for convenience and speed. As we head into the rest of the quarter, watch how these contract renewals play out in the quarterly earnings calls. The language they use will tell you everything about their future margins. Luna: We will be listening closely. For now, I think we have enough food for thought on how the hidden mechanics of business are reshaping our daily lives. Lucas: One last thing to ponder: if resilience pricing becomes the standard, will we ever see a period of true price stability again? Or is volatility the new baseline for capitalism? Luna: That is a question for the next decade. Thanks for tuning in to Stagflation Conversations.