Addressing inflation risks – A vital focus that needs a dynamic approach

How is inflation impacting the risk of disruption in your supply chain and your business? Most importantly, how can risk monitoring help you anticipate and address these risks?  

We have seen in recent months most of the major economies impacted with historically high inflation levels, with 8.6% in the US, 8.1% in the Eurozone and 7.7% in Canada. These numbers are measuring the weighted average price increase of goods and services (% change in Consumer Price Index or CPI) over the past rolling 12 months, mainly driven by higher than usual energy, commodity and food costs. 

In the meantime, global growth is expected to slump from 5.7 percent in 2021 to 2.9 percent in 2022, according to a World Bank Report. While we are observing a slowdown in the growth rate, the impact of inflation is expected to be felt for many months and even years to come. 

In this blog, we will not be focusing on the reasons or drivers like the conflict in Ukraine, crop shortages or Covid relief policies. We examine the impact of this inflation on business costs and profitability and approaches to better anticipate these foreseen impacts.    

So, what are these impacts of inflation we are alluding to? Impacts can be felt to varying degrees in different sectors of the economy but can be classified in 3 different categories: Financial, Social and Political.

By financial impact, what comes to mind first is the increase in interest rates from Central banks, affecting government debts to business and private loans. In the past two weeks, we have seen interest rate hikes in the US, UK, Switzerland, Brazil and Norway, to contain high inflation. Canada has hinted at higher rates. These can have a direct impact on investments and spending, spiraling to a global recession in a worse case scenario, if mitigation steps are not taken. But the financial impact could also directly affect your business as an increased cost of debt, higher number of customers defaulting on their past due payments and on your ability to extend credit limits to new or even existing customers. 

As for social risk, we have a decrease in the purchasing power of consumers. This directly impacts consumer confidence and their willingness to invest in durable goods. This reduction in demand can trigger a rise in the unemployment rate, putting even more pressure on companies and allocation of government resources. 

This brings us to political risk. Inflation can crystallize voter sentiments against their government, limiting their ability to implement needed reforms and increasing the rise of populism and protectionism. This can result in less global trade agreements, increase of entry barriers, political instability and less visibility for investors or entrepreneurs.   

In Conclusion..

Not everything is doom and gloom however. Even in the most tumultuous environment, some will find the opportunity to rise and benefit from the new opportunities that this reshuffled landscape will offer. The ones with the clearest view of trending indicators, and the best understanding of financial and ESG (Environment, Social and Governance) risks will come out ahead. It is particularly important to have good risk and market assessment tracking tools when the storm is brewing. 

Vertaeon, with its customizable risk and market analytics SaaS tool can bring you clarity in your decision making process related to your specific business challenges. We extract, aggregate and analyze millions of records for the above risks to bring you consolidated insights, leveraging AI and machine learning. 

Please navigate to  https://www.vertaeon.com and request a free demo to find out how we can help with our affordable SaaS platform.

Authors: David Chouvelon & Rekha Menon-Varma, Vertaeon LLC