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:
- 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.
- Use technology to improve efficiency and agility as quickly as possible to strengthen resilience.
- 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.
Are leaders prepared?
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
When inflation will peak remains unclear. Economic and business impacts will largely depend on the length and severity of the crisis as well as policy response.3 Few business leaders today have experienced anything similar over their tenure. Now, this new reality is testing their supply chains, their people, their customers and their stakeholders.
The good news
Despite the outlook, leaders may be better prepared than they realize. The operational changes they made to navigate the COVID-19 pandemic helped their businesses survive and thrive: In fact, our research shows the largest 2,000 companies globally grew by 11% between Q4 of 2019 and Q4 of 2021.4
Value generation differed among them, however. The more digitally advanced companies navigated the crisis without compromising profitable growth.5 From December 2021 to January 2022, 90% of c-suite executives reported that their organizations were undergoing rapid digital transformation.6 Some companies—we call them ‘Twin Transformers’—also combine digital transformation with an acceleration of their sustainability agenda.7
Economic cost pressures
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:
How cost pressures affect different industries
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
To identify your specific challenges:
- 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.
From insight to action: Use technology to help weather the storm
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:
- 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:
Be transparent with stakeholders
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
- 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.
Solving for today and tomorrow
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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