How businesses can survive & thrive through high inflation

The impact of the pandemic and the war in Ukraine has driven inflation to surge across the globe. Few C-suite executives have experienced these combined inflationary pressures and navigated their company through such an environment. In a high-inflation context, three imperatives are crucial for success and enduring competitiveness:

1. Pay close attention to industry specifics. Inflation doesn’t always have broad-brush effects. A nuanced understanding of industry context will influence what levers you need to pull, and when.
2. Use technology to improve efficiency and agility as quickly as possible to strengthen resilience.
3. Be intentional about solving issues with stakeholders—customers, partners and employees. Doing so strengthens a company at its core.

After two years of pandemic and a war in Ukraine that threatens modern globalization, many economists, business leaders and policy makers agree: We have entered a high inflation environment that is fundamentally challenging business leaders and the way companies operate. New dilemmas emerge every day, spanning supply chain, manufacturing operations and workforce management to financial management and customer retention.

Since the global financial crisis of 2007–2009, companies have enjoyed ongoing economic growth and low volatility. However, even before the war in Ukraine, many economies were already experiencing inflationary pressures caused by extensive fiscal and monetary support measures, a shift of consumers buying more goods versus services and supply chain disruptions. As of January, 70% of global C-suite executives were expecting significant inflation in 2022, potentially reaching double-digit rates in select countries.¹ As a result, inflation is topping the priority list of many business leaders.

As war compounds issues like supply chain disruption and energy prices, the challenge has become real. Natural resource shortages along with soaring energy and housing costs, and constrained supplies of consumer goods have led to unprecedented inflation levels across major markets. As of March 2022, inflation reached 8.5% in the United States, 7.0% in the United Kingdom and 7.4% in the eurozone.²

Drivers of recent Consumer Price Index inflation

Many forces have come together to drive high inflation, and the effects differ by industry. The impact depends on cost structure—including energy, materials and wages—as well as the ability to pass costs on to consumers.

Inflationary cost pressures on profit margin are amplified as they pass through the various layers of the economy:

Industries will face different levels of cost pressure on margins, based on their cost structure.

Cost structure and cost pressure on margin by industry in Europe

Utilities, like power generation and distribution, are greatly affected due to their dependence on oil and gas. However, they may be able to manage impact by passing on costs, but within the constraints of regulatory price controls.

By contrast, the consumer goods industry is exposed to the high cost of energy indirectly, as many of their manufacturing processes rely on food, raw materials and resources from directly impacted industries. Food, beverage and consumer durables are likely to see significant disruption due to their reliance on agricultural commodities and raw materials; together, Ukraine and Russia supply 26% of global exports of wheat.⁸ The food, beverage and consumer durables sector also is highly price-sensitive and vulnerable to consumer switching.

Other industries may suffer cost pressure even more indirectly. For example, the health industry is not a heavy direct user of energy or raw materials, but much of its cost structure depends on employee compensation. As prices of products they consume rise, workers will demand higher wages to try to maintain their purchasing power.

• Track market/industry insights
• Watch for internal indicators that point to the three types of economic cost pressures
• Consider how location factors in

Remember that challenges also vary by geography and industry. Areas that rely on production from other regions may be more exposed to energy and food inflation. Other geographies may have social, political or institutional constraints that prevent them from handling inflation shocks, resulting in volatility.

The US, meanwhile, would primarily be affected by higher oil prices and their knock-on effect on household wealth and consumer spending. In the event of a protracted impact scenario, Oxford Economics estimates that US GDP could decline relative to pre-war estimates by 1.0 percentage points in 2022 and 0.6 percentage points in 2023.

Will I lose my customers if I pass on the cost of inflation? Will my competitors price me out of the market? How will I pay my employees? What’s the best procurement strategy for a highly inflationary environment? Will I remain competitive overall?

Leaders may need to make tough choices quickly. Anticipating change and planning for a range of scenarios is essential, and the more intelligence, the better.

“Intelligent” enterprises use integrated, cloud-enabled planning and performance analysis tools to improve how they capture and analyze data. From there, they can garner valuable insights to fuel decision-making around critical issues, including:

• Pricing
• Sourcing and procurement
• Labor costs and compensation
• Input costs
• Supply chain disruptions
• Competitor pricing
• Customer relationship management
• Consumer spending power
• Vertical integration

Trade-offs: What to expect and how to address them

The optimal strategy improves the company’s data gathering and analytics capabilities and uses technology-enabled solutions to calibrate the best response to the difficult trade-offs that inflation demands:

While insights are crucial, transparency is equally so. Be forthcoming with stakeholders about the changes you’re making to address inflation, especially with customers, employees and ecosystem partners. This could be as straightforward as:

• Taking an end-to-end view of the entire value chain to identify additional value pools.
• Giving customers advance notice of price increases.
• Setting employee expectations around midcycle wage adjustments and other nonmonetary benefits.
• Updating suppliers regularly on purchase decisions.

Be sure to collect feedback and response data so you can understand how stakeholder reactions may affect your business and adjust accordingly.

Inflation may be here to stay, but with solid insights and sharp decision-making, it is still possible to create value for your stakeholders. Understand how inflation will affect your industry, your ecosystem and your employees (in the short-, mid- and long-term), and act early to improve your data capabilities and build transparency on all fronts. It’s all part of the foundational strength businesses need to survive and grow—both now and when high inflation is no longer a critical concern.

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