PRO Business MS

Accounting and Finance

Your business in times of stagflation

Inflation will remain high for some time now. On 7 June the World Bank warned that “many years of average inflation and below-average growth now appear likely.” A new study by Marijn Bolhuis, Judd Cramer and Lawrence Summers finds that if you measure inflation consistently, the rate today is almost as high as it was at its peak in 1980. As the past creeps over the future, “inflation” is the busy corner of the office. Today’s officers may consider themselves battle-hardened – they have experienced a financial crisis and a pandemic. However, the challenge of stagflation requires a different toolkit that borrows from the past and includes new tricks.

The primary task for any management team is to protect margins and cashflow, which investors favor for revenue growth when things go bad. This will require fighting hard in the abyss of the income statement. Although margin increases in the form of inflation for the first time last year prompted politicians to denounce corporate “greed,” after-tax profits actually come down to the share of GDP when all U.S. firms experience Price continues to rise on the basis of 1950 (see chart 2). To create shareholder value in this environment, companies must increase their cash flow in real terms. This means a combination of cutting expenses and passing cost inflation on to customers without reducing sales volume.