During 2021 and 2022, consumer inflation accelerated in most developed and emerging economies. In the United States, the consumer price index (CPI) rose from 2.6 percent in March 2021 to 8.5 percent in March of this year.
In June, the pace reached 9.1 percent, the fastest in 40 years, while producer prices have increased faster still. In the eurozone, consumer inflation reached 8.6 percent in June 2022, its highest-ever level
Investors, economists, and forecasting institutions expect inflation to ease, but only gradually. (July measurements were somewhat lower in the United States but higher still in the eurozone.) The return of inflation is linked to the pandemic—the public-health measures taken to contain the spread of the virus and the economic and fiscal measures taken to mitigate the disruption this caused. The Russian invasion of Ukraine is exacerbating the inflationary dynamics.
Inflation accelerated in an environment of strong consumer demand, supply shortages, production shortfalls, and rising energy prices. The main inflation driver, energy prices, increased in Europe by 38 percent in April and by 45 percent in March. In June, the core inflation rate in the eurozone (inflation excluding energy, food, alcohol, and tobacco) was 4.2 percent, a record level but one that underscores the lopsided composition of the overall rate.
For many companies, a high-inflation environment is an unstable and insecure one to operate in. Responding to inflation is of paramount importance now, but responses must carefully account for future inflation, impact on the company business model, and the time lag for any response to manifest.
Analytics can be used to improve decision making in a high-inflation environment, with the level of analytics sophistication determined by the business requirements. In sectors where businesses are highly specialized and margins are thin—such as consumer packaged goods—analytics will need to be more precise to aid in developing a nuanced understanding of exposures. On the other hand, high-margin enterprises (software development or luxury goods, for example) can benefit from a more conceptual approach, without building deep analytics.
Inflation forecasting is a separate and complex topic of its own, and in developing inflation responses, most organizations use forecasts and scenarios developed externally. Analytics for decision making, on the other hand, cannot be outsourced. Without resorting to direct inflation forecasting, companies can use a flexible, analytically sophisticated method to help determine how and when to react. The approach includes assessing the extent of exposure and breaking down the types of exposures.
