Is the prospect of deflation good news for your business? Probably, but not necessarily. This article examines ways you can mitigate the downsides.
Much is being made of the drop in the rate of inflation in the UK and the possibility of deflation, largely due to the falling oil prices.
On the face of it, this is good news as the things we purchase are getting cheaper.
However, this can have negative effects too, particularly when you are selling goods or services. Customers may put off purchasing goods or services, thinking that they will continue to fall in price, resulting in a drop in revenue.
Compounding this is the risk for a supplier if it has entered into a long term contract at a set price for the supply of goods or services to enable it to produce its own goods or services.
One way to cater for this is to ensure that all contracts contain a price review clause, to cater for changes to the cost of the supplier’s input goods and services (and possibly also its output goods and services).
Such a clause will need to be well drafted and contain a clear mechanism for the price review. It is likely to require a trigger event (for example, every 12 months or any time after a defined period of excessive inflation/deflation), a process for the price adjustment and guidance on the factors that should be taken into account on the review.
The courts have found some price review clauses to be unenforceable depending on the facts, so the more clarity and certainty that can be drafted at the outset the greater the chance the review will work as the parties intend.