Inflation has been ticking upward for months, and with the U.S. Federal Reserve indicating a March rate increase, there are concerns heightened inflation could persist. Business leaders, and specifically CFOs, will be weighing the impact on their businesses — and how others interpret the moves they make to mitigate inflation. Smart CFOs will then develop plans in the areas of pricing, wage and talent investments, the deployment of new technology, and M&A opportunities.
It’s hard to say how long the inflationary period will last. Deloitte assesses rising prices are rooted in short-term pandemic-driven factors like supply chain disruptions and shifts in consumers’ purchasing decisions. That may indicate high inflation is temporary. Once disruptions abate, prices will likely normalize.
Nevertheless, even the best-case scenario leaves CFOs with a year-long problem: operating efficiently while costs to run the business climb. Crucial decisions about maintaining productivity, pursuing growth, and adopting labor-saving technologies will be required.
According to the Federal Reserve Bank of Atlanta’s wage tracker, wages for U.S. workers grew 5.1% in January. However, wage increases have fallen behind the inflation rate, even as companies have committed to investing in talent. Deloitte’s Q4 2021 CFO Signals™ survey found 97% of CFOs expect talent and labor costs to rise substantially in 2022. Separately, many companies feel compelled to boost compensation to attract new labor in an inflationary environment.
If inflation becomes embedded in worker expectations and leads to a wage-price spiral, it could rise to a range of 8% to 9% through 2024.
That said, note that we’re in the early days of heightened inflation. Rising prices in sectors such as food, housing, and energy, along with signals from the Fed, could begin to change the consumer psyche. For example, suppose employees, feeling the strain of inflation over time, pressure their employers to raise compensation again. That could usher in a wage-price spiral and generate higher, longer-lasting inflation.
A Deloitte report, “The inflation outlook: Four futures for inflation,” notes if inflation becomes embedded in worker expectations and leads to a wage-price spiral, inflation could rise to a range of 8% to 9% through 2024. That scenario would dampen both consumer and business spending. While perhaps a worst-case scenario, CFOs need to monitor confidence metrics and listen to how employees feel about their compensation in relation to inflation.
Innovation and implementation allow organizations to unlock new efficiencies and increase productivity. Until recently, the FP&A process relied on backward-looking data. Artificial intelligence and similar technologies can now help finance executives make astute predictions and real-time assessments using more accurate data models. Those advancements can give CFOs an advantage when planning through uncertain economic cycles like the current one. Unsurprisingly, our Q4 CFO Signals survey found 92% of CFOs anticipated increasing automation in their organization and embedding more technologies.
Driven by the tight labor supply, business productivity is accelerating as companies invest in labor-saving and labor-augmenting technologies. CFOs will focus on integrating technologies that allow for real-time operational analysis and accurate predictive modeling. They’ll also invest to ensure their workforce can get the most out of these technologies.
Despite a projected series of Fed funds rate hikes, interest rates are likely to remain historically low by the end of 2022. The real (inflation-adjusted) yield on a 10-year treasury bond remains negative, indicating an excess supply of credit. What’s more, several factors could suppress yields, including expectations of lower inflation, government borrowing declining, and excess savings both globally and nationally. The cost of capital will likely remain cheap.
For finance executives, it means the environment for M&A should stay favorable. In the Q4 CFO Signals survey, 67% of CFOs said their companies plan to pursue M&A deals and joint ventures. CFOs will likely focus on how deal-making can support strategic capabilities, bolster their workforces, and improve or expand offerings. While executives and deal teams may exhibit caution ahead of rate hikes, we don’t expect sharp declines in activity in the short or medium term.
As the inflationary environment plays out over the next year, finance executives will need to reevaluate and adjust their strategies in the above areas while remaining prepared for the unexpected.