How to understand inflation's risks to business | WARC | The Feed

How to understand inflation's risks to business

As if the last two years hadn’t brought business enough uncertainty, 2022 counts not only the virus and its unpredictable adaptations but supply chain bottlenecks and the soaring rate of inflation across the world that present a whole new kind of problem – a new Euromonitor report on WARC analyses the risk.

Why it matters

Inflation is emerging as the dominant economic story of 2022, with some countries seeing the highest rates in decades. Global inflation is forecast to rise from 4.3% in 2021 to 4.6% in 2022.

It’s a complex topic for the marketing discipline, because it ultimately boils down to the fact that demand for goods has roared back following the pandemic, but disruptions to supply chains, energy price rises, and labour shortages mean that supply is unable to keep up.

While supply constraints should ease, and commodity prices should normalise, Euromonitor indicates that as more economies reopen, demand for services will take the pressure off the supply of goods.

Significant risks remain

Much of the trouble boils down to energy and labour.

• The Russian invasion of Ukraine and the tough sanctions imposed on the aggressor are likely to send energy prices soaring.
• Labour shortages, with a particular possibility of China’s continued zero-COVID policy, could continue.

Likely impact

• Rising inflation means a decline in real consumer incomes.
• Consumers will adapt, with many switching to lower price brands, seeking more promotions, or buying in bulk.
• Companies are likely to feel an impact on margins ahead of an impact on revenues, but these could come soon.
• Some large consumer goods companies have used their pricing power to pass costs on to the customer, while others adopt targeted pricing strategies by revising product portfolios (e.g. by enhancing private label offerings).
• Overall, companies are seeking ways to reduce inefficiencies and build resilience across the supply chain in an effort to cut costs and mitigate disruptions in the long term.

Sourced from Euromonitor