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Cash, Coffee and Inflation

“Invest in inflation. It’s the only thing going up.”

- Will Rogers

Were you astonished when you saw your Rs. 500 bought you only 5-6 grocery items? Or that the Rs. 2000 note wasn’t able to fill up your petrol car tank? Are you an entrepreneur who is struggling for a loan for your business? And are you taking your personalised coffee’s price personally? If yes, this article might help you understand why. The 2020s inflation started out as an expected phenomenon when all economies reopened after the lockdown. However, it did not reduce as expected. Even with higher interest rates and measures taken by central banks around the world, inflation soars globally. The quantitative easing introduced by the governments to curb the impact of the pandemic is still in effect. Economies are prone to recessions now with these inflated prices, and researchers are even surer since the US Bond Yield Curve inverted on 2nd August 2022.


Lighter packet-lighter wallet

Inflation is when the purchasing power of money declines due to reasons like increased money supply or low output from the economy, or a rise in prices of commodities like oil or food. Today, due to war and climate disasters, the IMF reports that global inflation in all advanced and emerging economies is almost 2 and 3 points higher than the estimate, respectively. There are two primary forms of inflation; cost-push and demand-pull. Cost-push is when production costs climb, resulting in the basket of goods costing more. Demand-pull refers to when the prices rise due to scarcity and high demand. So, what type has economics chosen to put us through in these uncertain times? The inflation we experience today is a mix of demand-pull and cost-push.

The empty car tanks

As our primary energy source, oil continues to exhaust, and its demand rises. And the direct relationship between demand and cost results in the costs rising. Furthermore, the disruption in supply chains after the pandemic has deemed primary resources scarce, thus increasing their price. With the rise in oil prices, it is inevitable for all costs to soar, accounting for the manufacturing and transportation costs. Besides excessive human usage, human war is also one of the leading causes of these shot-up prices. Ukraine and Russia play a vital role in the global economy, supplying essential minerals and crops. As they play their politics, countries face shortage and severe supply disruption of these now-restricted resources.

Lenders in need of borrowing

It’s not your business; it’s theirs As the value of money changes, all industries experience drastic changes too. The industry of borrowers and lenders is no exception to this phenomenon. Banks are a victim of inflation. Research shows that the change in inflation and the change in bank stocks are inversely related2. One of the primary reasons for this phenomenon is the cyclical nature of this industry. Here’s how: To battle inflation, central banks increase interest rates to slow economic activity. This pressure seeps down to the commercial bank, leading businesses to avoid loans, and deposited money starts to cost more. Similarly, banks thrive during the expansion of the economy. An economy is said to be at an expansion stage when consumer spending increases and businesses ‘supply’ to the ‘demand’ created. Spending increases when a consumer’s confidence in the value of money is high, and they are willing to spend it. This results in more businesses opening up, ready to buy loans and deposit huge amounts. In 2018, US banks showed that they didn’t have sufficient revenue and rising costs only increased expenses. From 2010, banks had seen a 7% revenue growth and an 8% rise in costs in 2016 in the US3. Even after depressing numbers of the banking sector, it shows uneven development across the globe, owing to the COVID-19 pandemic.

Moreover, the economic shutdowns led to higher non-performing loans for banks. However, considering the extent of this crisis, the International Finance Corporation’s survey resolute that banks will recover by the end of 2022, and only some were concerned about liquidity problems4. Source 1: Boston Consulting Group Regardless, banks have been seeing low-profit margins for far too long now. As a result, commercial banks are reluctant to provide loans to entrepreneurs and Micro, Small and Medium Enterprises (MSMEs). The required collateral has been hiked, and loan amounts have been reduced, diminishing Business Confidence. Banks do this to maintain their profit margins, but one can say that this has backfired in the big picture.

Our Unanticipated Lender

However, one more hidden lender in the banking market faces an almost similar effect. Starbucks holds 1.2 billion USD in their customers’ Starbucks accounts and gift cards, redeemed through coffees and snacks. This makes it the 385th largest bank in the USA out of the existing 3000. The company acts like a bank when customers load their account considering their coffee consumption; that money is redeemed only through product purchases. This way, the company enjoys interest-free loans. Sometimes this income is not only interest-free but completely free. Studies estimate that as the company’s millennial and Gen-Z customer base grows, it celebrates free money as 40% of that group alone loses their cards and account IDs. In 2020, 164.5 million USD sat lost and unredeemed. Figure 2: SBUX stock and NASDAQ Bank have a similar reaction to inflation However, as the CPI of the USA climbs, Starbucks costs more to its customers. Each purchase credits more from their customers’ accounts and many switch to cheaper alternatives for their daily coffee. Especially after the previous price hike in October 2021, consumers are not very “pleasant” about the now-$3 coffee, pointing out the profits that are not being reinvested into the company but being compensated to the CEO and executives. Much like the high cost of borrowing that drives banks to the ground in such uncertain periods.

What Lies Ahead

A rational consumer’s behaviour prioritises maximising utility at a minimum price. During inflationary periods, consumers shift to cheaper brands, and even loyalty premiums are not enough to hold them back. Banks lose interest-paying borrowers, and companies like Starbucks, dependent on gift cards or prepaid modes of payments, lose their, well, prepayment. In cases of hyperinflation, institutions across all sectors shut down and can’t function. The most recent example is Sri Lanka. Financial institutions are predicted to operate weakly for the upcoming year. High liquidity, non-performing loans and credit risk have deteriorated the value and credibility of commercial banks for both investors and depositors. Inflation is a lagging indicator of recession, meaning one is on the move or has already happened. As we fight climate change, corrupt governments, and each other, confidence indices rightfully plummet, resources become restricted, and human crises amplify in every socially-conflicted nation as humans stand even more divided. Banks are just as affected as consumers, coming to terms with higher surviving costs and self-perseverance. As this economic crisis persists and is like no other, prices are bound to increase further, endangering lenders and our favourite coffee shop.

S. Mysha Urooj
High School Student


Kekarainen, H., 2022. The return of inflation. [online] Deloitte Suomi. Available at: [Accessed 4 August 2022].

Santoni, G., 1986. The Effects of Inflation on Commercial Banks. [ebook] Available at: [Accessed 4 August 2022].

Alf, D., Gossy, G., Haider, L. and Messenböck, R., 2022. Four Ways Banks Can Radically Reduce Costs. [online] BCG Global. Available at: [Accessed 4 August 2022].

Savonitto, B. and Yang, J., 2022. Banks Show Strong Signs of Recovery from the Pandemic. [online] Available at: [Accessed 4 August 2022].

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