After being largely under control for the last four decades, inflation is accelerating in the U.S. and around the world as economies rebound from the pandemic recession with a strength and speed that has caught many businesses off guard. This is posing significant challenges for chief financial officers (CFOs), who must contend with increasing costs while helping their company remain profitable. Here is a look at the current situation and how CFOs can adapt and plan for rising costs in 2022.
Current Inflation Rates
According to the U.S. Department of Labor, the Consumer Price Index rose 8.5 percent in March from 12 months earlier in the largest year-over-year increase recorded since December 1981. At the same time, inflation increased by 1.2 percent in March over February’s level in the biggest one-month spike since 2005 and a marked rise over the 0.8 percent bump noted from January to February.
With inflation reaching levels that have not been seen in several decades, many CFOs are faced with an economic situation they have never dealt with before. Even those who can remember the last time inflation was this high can make few comparisons to the current economic climate. The role of the CFO was far different in the 1970s and 1980s than now, and many of the problems being seen this time around were not on the radar back then — specifically disruptions in the supply chain, tight labor markets, and shifting consumer demand.
Unfortunately, as the economy recovers from the pandemic and the war in Ukraine shakes up global markets, it is difficult to predict when inflation might recede. However, no matter which way the economy is headed, there are still growth opportunities that savvy CFOs can take advantage of.
Some businesses are being hit harder than others. Inflation is being acutely felt by anyone consuming commodities, especially builders and industrial manufacturers. Moreover, as inflation grows, commodities and shipping costs are also on the rise as demand snaps back post-pandemic.
CFOs have several tools at their disposal to address these conditions. Some are choosing to pass on the higher costs in the form of price increases to consumers, but this only works when they have the pricing power to do so successfully. Large corporations and small businesses alike are raising their prices, and it has done little to deter consumer spending so far.
Some companies are taking a different approach and trying to manage their spending. Some are bidding out more for certain services and issuing requests for proposals to ensure they are getting the best prices possible, but this is not enough to completely offset inflation.
It can be tricky for employers to adjust their annual compensation and benefits in response to surging inflation. Many employers have continued with the traditional average annual salary increase of three percent in the past few years to avoid getting locked into paying workers an inflation-adjusted salary in case inflation starts to subside soon.
However, they are using tactics such as implementing retention bonuses to provide valued employees with a financial incentive to stay with the company. This allows them to account for inflation without committing to a long-term increase in salary.
How Interest Rates Relate
This high inflation is accompanied by higher interest rates. The current interest rates have reached highs not seen since the fall of 2008, and the many inputs within the U.S. economy make the situation very complicated. There are risks involved in being too aggressive and not aggressive enough, and the effects of tightening policies could take years to ripple through the economy.
Many experts believe that CFOs do not need to worry too much about this right now. The bigger issue, they point out, is the U.S. Federal Reserve Bank tapering larger-scale purchases, and businesses need to prepare for the Fed shrinking its balance sheet.
However, as long as the economy remains on a path of growth, there is capital available. Buyers and sellers may need to make adjustments for higher interest rates, and there could be more smaller deals as a result.
The Labor Market and How It Is Affected by Inflation and Interest Rates
Filling jobs and retaining valued employees is a major concern for CFOs in 2022. Right now, the labor market in the U.S. is facing significant challenges, with many job openings going unfilled. CFOs need to consider the pressure of the tight labor market carefully as they make plans for hiring and retaining talent.
There are two main reasons that companies have been struggling to find the employees they need. The first is a talent mismatch, which is something that CFOs have been complaining about for many years. Now, however, this is being compounded by the fact that many people are simply not going back to work yet.
Some are hesitant to go back to work due to COVID-19 fears, while others are staying home because they do not have childcare or do not want their children to return to school. Some people are even opting out of the workforce altogether.
Right now, America has a record-setting 1.8 jobs open for each unemployed worker, the New York Times reports. This is giving employees greater control, and many are commanding better benefits, higher pay, and flexible schedules.
Innovative hiring practices, better wages, and more salary reviews are all good approaches. Some companies are offering greater flexibility to attract employees who would prefer to work from home, while others are offering generous signing bonuses. Others are extending their typical vesting periods for retirement plans to discourage employees from leaving.
Creating meaningful additions to benefits packages is a good way of attracting workers, but it is also an important step for businesses that are unable to fill vacancies as it can help them to retain existing talent.
One economic issue coming into play is the wage-price spiral. When people earn higher wages, they begin to demand more goods and services, which causes prices to rise. Wage increases also mean higher general business expenses, which are passed on to consumers in the form of a spike in prices. This can trigger a perpetual loop of price increases. Although wages may be higher, the increase in prices spurs workers to demand even higher salaries, and this continues until wage levels can no longer be supported.
Wages in the country are now rising at their quickest pace in 40 years, but wage growth is not managing to keep up with rapid inflation, so some workers are struggling to stay afloat financially even as their paychecks grow.
In March 2022, wages increased yet again, in news that was welcomed by workers across the nation who must contend with higher prices on everything from groceries to gas. These higher wages have been drawing people back to the labor force. However, they are not growing enough to keep up with inflation. When annual compensation rises 3 to 5 percent, for example, but inflation hovers at 7 or 8 percent, employees effectively experience a pay cut, which is not an optimal situation when there is a severe talent crunch giving employees considerable leverage.
Deloitte’s “The inflation outlook: Four futures for inflation” report noted that inflation could rise to 8 to 9 percent through 2024 should inflation become embedded in workers’ expectations and set a wage-price spiral into motion. This may be a worst-case scenario, but CFOs should be gauging employees’ opinions about their compensation as it relates to inflation and monitoring confidence metrics.
The Federal Reserve can use monetary policy or interest rates to try to curb the wage-price spiral, and some experts have suggested that the Fed needs to react more aggressively to try to slow the economy. By lifting interest rates, money becomes more expensive to borrow. This can slow spending and help put the situation back into balance. However, should the Fed raise interest rates to high levels to help correct the economy, it could spur a recession that results in even higher unemployment. It is a difficult balance to strike.
How Digital Acceleration Is Being Impacted
Businesses that struggle to find workers may turn to technology to give their productivity a boost. In 2022, CFOs need to be more technologically savvy to find new solutions to worker shortages. Computers can help automate many of the tasks people perform manually to save time and unlock new efficiencies. Investments in labor-saving technologies are helping companies to make up for talent gaps.
For CFOs, managing the challenges in the current economic climate requires being proactive to predict business impacts.
The most successful CFOs are those skilled to lead a digital transformation and who can leverage technology to their greatest advantage. CFOs need to use all the data, predictive analytics, and modern technology tools to create dynamic plans as well as contingencies to adapt to the current economic volatility.
Learn More with New City
An effective way of planning for rising costs is reducing expenses, and healthcare costs are one area where many companies may be able to find savings. On average, healthcare costs have risen more than the inflation rate over the years, which means businesses are spending more than ever on health insurance.
There are many options for affordable group health insurance that can help companies cut costs significantly at a time when every dollar counts. The benefits consulting team at New City Insurance works with businesses to help them get the lowest rate possible with the best benefits and can customize plans to ensure they suit the company’s employees and budget.
To find out more about how affordable group health insurance can help your business save money in the face of rising costs, speak to the experienced benefits consultants at New City Insurance today.