If inflation is eating away at your personal assets, it’s also taking a toll on your business. So, how do you handle that? Particularly when you rely upon ongoing business contracts with customers?
At the outset, never promise your customers lifetime flat fee pricing for any service. And if you do, include an explicit caveat that you reserve the right to adjust pricing to account for inflation.
In addition, you’ll want to build into your written contracts specific language that gives you the ability to raise pricing based on inflation. And tie it to a readily identifiable measure (e.g. the Consumer Price Index) so that both parties can quickly determine if a threshold has been met that justifies a price hike.
Now an old school method (common in the early 20th Century and before) was to price business leases and other ongoing contractual obligations in gold or silver rather than the U.S. Dollar itself. Payments were either made in the physical precious metal or in dollars based on the value of the precious metal at the time a payment was due.
Tying payments to precious metals hasn’t been popular recently for a variety of reasons, including trading manipulation of the pricing of gold and silver.
However, if inflation continues to be an issue and there’s an objective means to value physical precious metals (not the paper trades of nonexistent metals) that both parties will agree to, then this is an option. Or the parties agree at the outset that payments are to be made in physical gold or silver (or some other store of value) instead of the dollar. For example, an office space lease that provides for monthly rent to be two troy ounces of physical gold.
What about cryptocurrency as a means to protect against inflation? At the present (2022), cryptocurrency appears to be a volatile speculative bet rather than a store of value that could be used as an anti-inflationary tool to protect your business.
Some believe that central bank digital currency (e.g., a digital Euro) could serve as the solution. However, digital is even easier to “overprint” — and devalue in the process — than physical fiat currency.
So, for the time being, the easiest course of action would be to give yourself flexibility by simply acknowledging in your contracts that pricing can change based on inflation.
Tie that to some objective standard for measuring inflationary changes. And make it easy for both parties to know when and how pricing will change to account for monetary devaluation.
If you need help with your business contracts, it’s probably time to set up a phone consultation with Business Lawyer Mike Young.