Inflation Update: Around the World, CEOs Expect Pricing Pressures to Continue This Year and Next
28 January 2022 |
The C2FO Team
As 2022 begins, businesses around the world are accepting a hard truth: Higher inflation will probably be a fact of life for 2022 — and possibly beyond.
Pricing pressures, combined with the promise of interest rate increases as soon as March, will make it more important than ever for companies to take control of their cash flow and find ways to maximise their working capital.
C2FO has been monitoring these trends for the past several months, but recent weeks have offered new evidence that inflation will drive decision-making in C-suites in most markets.
According to a new global CEO survey from The Conference Board:
- CEOs ranked rising inflation as the No. 2 external threat for the coming year, behind only disruptions related to COVID-19.
- Only 10% of respondents expected pricing pressures to resolve by mid-2022. The largest group (35%) predicted it will continue through 2022, while others said it could persist through mid-2023 (24%) or beyond 2023 (31%).
- About 82% of the respondents said they were facing increased costs for wages, raw materials and other inputs, with 93% of Chinese executives agreeing it was a problem.
- Regions view the risk differently. European CEOs listed inflation as their No. 1 risk, while it was No. 4 for Chinese executives. Inflation wasn’t even a Top 10 worry for Japanese leaders, though they were concerned about labour shortages, changes in consumer behaviour and volatility in energy prices.
Companies in C2FO’s network said they have started to feel the pinch of higher costs.
Delilah Home, the award-winning maker of organic sheets and towels, is seeing the price of cotton and hemp increase by 20% to 25%. Meanwhile, supply chain shipping has become more expensive, too. A shipping container that used to cost $3,300 might now run $18,000 to $25,000.
As a result, the company raised prices slightly, though less than what competitors did, said Michael Twer, Delilah Home’s CEO and founder.
“In order to remain competitive, we absorbed most of the increase, but I’ve had to pass along a small increase to my customers, effective the first of the year,” Twer said. “Which I hated to do, but it’s a necessary evil.”
That echoes what C2FO has noticed on its platform. In December, the average invoice value, which could be considered a proxy for production costs, was 11% higher than a year prior, or up 11.2% for the US market only.
“Inflation is going to dominate the next several months at least and force businesses to be even more adaptive, more creative, than the pandemic did,” said Chris Atkins, senior vice president of C2FO Capital Finance. “Managing margins — and keeping a steady flow of working capital — is going to be essential.”
Inflation records set in several markets
The most recent reporting shows that business leaders have good reason to be wary about inflation:
- In the United States, the consumer price index was up 7% in December on a year-over-year basis, the biggest 12-month jump since 1982. The Producer Price Index increased, too — 9.7% YoY, the largest annual increase since the US started tracking this metric in 2010.
- At the same time, the eurozone experienced inflation of 5% YoY, the highest ever recorded. The United Kingdom saw annual price growth of 5.4%.
- Canada’s consumer price index climbed by 4.8% YoY in December, the greatest increase since September 1991, when the CPI grew by 5.5%.
- India’s consumer price index increased by 5.59% YoY, though that was within the Reserve Bank of India’s tolerance level of 2% to 6%.
- China’s producer price index grew by 10.3%, which was less than expected, and consumer prices were lower.
Where prices are rising
In the US, inflation could be seen most clearly in prices for new and old autos, home furnishings and operations, apparel and medical care. Energy actually decreased, as did the indexes for recreation and motor vehicle insurance.
“While the year-over-year rate increased for headline CPI, the associated month-over-month rate cooled for a second month,” principal economist Erik Lundh wrote in a blog post at The Conference Board.
“This shorter-term interpretation of the data remains quite high in historical terms, but suggests that some of the pressures underlying rapid price increases may be moderating. However, recent staffing and supply chain disruptions associated with the surge in COVID-19 Omicron infections may reverse this trend in early 2022.”
Though US food prices rose more slowly in December, research firm IRI is predicting food prices will increase by 5% in the first half of this year.
Several of the world’s leading producers — including General Mills, Campbell Soup and Kraft Heinz — have already announced increases. Mondelez International, the home of brands such as Oreo and Triscuit, planned to raise prices for several products by 6% to 7%.
In many cases, increases are inevitable. But there may be strategies that companies can deploy before raising their prices.
Adopt dynamic discounting to create greater value for buyers and suppliers
Most suppliers are familiar with static discounting terms like 2/10 net 30 because they have been a standard, easy-to-understand payment term: If a buyer delivers payment within 10 days, they’ll be given a 2% discount. The supplier receives its cash faster, so it can reinvest in its business while the buyer lowers its cost of goods sold (COGS).
But what looks like a good deal for suppliers really isn’t:
- Static discounts, like 2/10 net 30, aren’t as useful for encouraging the earliest possible payment. A buyer could hold on to payment until Day 10 and still receive the same discount as someone who paid on Day 1 while achieving a higher effective APR for its cash.
- Static discounts don’t lower prices meaningfully because suppliers often automatically build the discount into the COGS. The discount essentially becomes a lever to force buyers to pay within the first 10 days of the invoice.
Dynamic discounting, like the kind offered through C2FO’s platform, will be a better solution for many suppliers because it delivers the greatest discounts to those who pay earliest while gradually reducing that discount throughout the month, even beyond the 10-day window.
Accelerate the cash conversion cycle to free up working capital
To adapt to higher inflation, companies should devote more energy to reducing the length of their cash conversion cycles (CCC), the time it takes to turn cash into inventory into sales into cash again.
If capital is tied up as inventory and receivables, it reduces the cash on hand that can be used to respond quickly to pricing pressures — for example, purchasing more inventory and raw materials before even higher prices take effect due to inflation.
Two of the best ways to shrink the CCC and accelerate working capital are by encouraging early payment of invoices or by financing your company’s receivables through a service like C2FO’s Capital Finance offering.
The Bottom Line
Executives around the world are bracing for high inflation through this year and possibly beyond. The most recent reporting — with rising and even record-setting YoY inflation rates in multiple markets — indicates those fears could be justified.
In times like these, having ready access to working capital is crucial for businesses so they can quickly adapt to changing conditions and protect their margins. Fortunately, C2FO’s working capital solutions can help companies accelerate their cash conversion cycle and free up cash when it’s needed most. Discover how the platform works.