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Navigating Inflation

For decades, elevated inflation has been like an economic specter, discussed more in classrooms than board or living rooms. Today, inflation and its impact are very real, with the consumer price index (CPI) and other measures reaching their highest levels in decades. With global events layering on more uncertainty, it is important to understand the economic environment and steps businesses can take to navigate it.

Why has inflation escalated?

Navigating Inflation
The pandemic created a perfect storm of anomalous factors. Taking a very broad look, many consumers spent months in lockdown accumulating savings that were strengthened by government stimulus — only to be let loose into a reopening economy plagued by supply chain breakdowns that shot materials costs sky high and made it impossible for companies to meet the accelerated demand. Meanwhile, a sustained nationwide labor shortage has compounded supply chain issues and driven wages higher as companies compete for talent.

Together, these pressures have a snowball effect that may be compounded by the economic aftershocks of the Russia-Ukraine conflict. Prices keep going up as companies respond to significant demand and the challenges and expenses they face to meet it.

Want an example? Look no further than soaring lumber prices, rising rents or the nearly 40 percent increase in the price of used cars during 2021 after unexpected demand hit a supply of new vehicles limited by supply chain constraints.

What is the impact?

Inflation is complex. On one hand, it signals growth, with increased wages and prices that can put some people and businesses in better positions to pay down debt. On the other, these increases can be hard for businesses or individuals on fixed incomes to absorb.

The Federal Reserve (Fed) is taking steps to cool down the heating economy by increasing interest rates and halting or reversing other actions it took, such as rapidly increasing bond purchases, to stimulate the economy during the pandemic crisis.

How to manage?

Managing a business through inflation can be challenging. Add in the hurdles presented by the pandemic and geopolitical unrest and companies are in largely uncharted territory. Do not overcorrect in response. It is unlikely that demand can sustain peak levels and overinvestment in inventory could have adverse consequences when supply chains and buying activity normalize. Instead, look for opportunities to strengthen your organization long-term. For example:

  • Look beyond compensation to position yourself positively with talent. Evaluate your benefits to ensure you are competitive and in touch with employee needs and preferences.
  • Make sure you have adequate cash flow to navigate through the cycle and beyond.
    • Negotiate flexible pricing contracts with both suppliers and customers.
    • Analyze your income statement for opportunities to cut costs before passing them on to your customers, which can affect brand loyalty.
    • Invest in automation, especially for production or administrative processes, to improve efficiency and enable employees to focus on meaningful work. This also could provide relief for teams that are potentially short-staffed due to hiring challenges.
  • Keep an eye on avenues for growth. If organic expansion is cost prohibitive, consider whether an acquisition or merger may present an economy of scale, enabling you to diversify your client or product base on a diluted cost basis.
  • Prepare for inflation’s impact on your personal investments. A trusted advisor can guide you through patient portfolio management, risk-conscious investments in assets such as gold, and other buffers against volatility.

Throughout, it is important to work with a partner like FNB who has comprehensive capabilities and a strategic understanding of your complete financial picture.

Hedging Against Inflation

With ongoing uncertainty caused by the pandemic stoked even further by conflict in Europe, there are questions about how high interest rates may go as the Fed seeks to manage inflation.

Do not let concerns about inflation or interest rates preclude strategic investments in your company. An interest rate hedge, or swap, can be an effective tool to insulate your business from a potential rising rate environment so that you can stay on track toward your goals, whether you are refinancing existing credit or seeking capital for expansion or other improvement opportunities.

It is important to remember that rates are increasing from near-historic lows, so it may be to your benefit to lock in rates in the near-term.

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