// . //  Insights //  The Right Way To Assess Inflation Risks

Continued high rates of inflation have most senior executives convinced that a recession is looming. But the specter of tough economic times doesn’t necessarily portend a bleak scenario for all businesses. Many leaders already have been proactive in overhauling elements of their operations in anticipation of worsening conditions. Their foresight has helped increase their organizations’ resilience, and ultimately will enable them to come out of a recession stronger than they entered it.

To accomplish that feat executives must pull the right levers amid uncertain circumstances, especially when it comes to making investment decisions. They will need to scrutinize cash flow, renegotiate pricing agreements, and evaluate existing assets. Another vital step is assessing the numerous risks to the company’s financial position resulting from high inflation. Executed effectively, in the long term such strategies can render a global recession just a small bump in the road.

of C-suite believe inflation can drive transformation

While a majority of C-suite executives (80%) believe the current economic situation will lead to a recession, according to Oliver Wyman’s C-suite Inflation survey conducted October 2022, the data also shows that the same percentage believe “inflation could drive transformation.”

In fact, when inflation reached what they perceived to be an alarming level, 37% of US C-level executives repositioned their brands and one-third reevaluated their product portfolio/customer strategies. That’s in addition to the cost-optimization strategies that CEOs on a global scale have employed, similarly, once inflation hit an alarming level.

These transformational strategies align with OW’s four C’s framework for recession readiness. Company leaders need to focus on the following to be resilient during tough economic environments:

Cash, liquidity, and asset assessments to maximize liquidity.
Critical organizational assessments to optimize spend.
Communications and renegotiations with lenders, vendors, customers, and other stakeholders.
Competitive business design reviews to be ready for any strategic opportunities.

With appropriate preparation, recessions can provide a moment of opportunity for companies to optimize operations and build a leaner organization. This can also be a time to conduct strategic acquisitions and grow market share while realizing synergies. However, a solid grasp and focus on available liquidity and cash flows will be key to be able to quickly pivot as needed. In addition, early communication with all stakeholders and staff will be necessary to successfully navigate and emerge unscathed from turbulent economic times
Tim Hoyland, Oliver Wyman

An inflation investment team checklist

Most economies are battling with high inflation for the first time in decades. Many investors are in unfamiliar territory. With corporate profits on the order of 10% to 12% on average, and European inflation at 10%, differences in inflation rates for revenue and costs can have a very real detrimental impact on profits.

In a recent LinkedIn post, Oliver Wyman Partner Chris McMillan outlines a checklist across seven inflation risks dealing with prices, costs, and capital spending to continue to make informed investment decisions in this current climate. The risks focus mostly on the first-order impacts of inflation on company economics as opposed to longer-term shifts in demand or consumer behavior.

Risk 1: Limited ability to pass through price increases. In the Oliver Wyman C-Suite survey on inflation, 65% of respondents said they have modified their price strategy either when inflation was at a moderate level or when it had reached an alarming level.

Risk 2: Price positioning at risk of trade-down.

Risk 3: Price regulation.

Risk 4: Cost of goods position — 77% of respondents in the inflation survey said they have implemented general cost reduction either when inflation was at a moderate level or when it had reached an alarming level.

Risk 5: Wage pressure ahead.

Risk 6: Overhead position.

Risk 7: Ongoing capex much higher than historical depreciation.

Inflation is triggering broad transformations that have been pushed back for too long. Check back in with The Inflation Shift to discover how the public and private ecosystem could aim for better production, better consumption, ESG mindsets, transformed organizations, and more.

The Inflation Shift article series