A global issue of high inflation distressing economic stability

INFLATION IS REVERSING THE ECONOMIC GROWTH

After diminishing severity of the Covid, 19 pandemic effects and the invasion of Ukraine by Russia have resulted in a distressing outlook further by a negative effect on the already fragile global economy, with melodramatic effects in each sector of industries. With massive employment, lower production, shrinking global trade, sanction of various countries, and no facility of swift, Russia almost restricted Ukraine to export or import--- all these actions caused an increase in food prices, energy prices, and other distortions of the global economy. Due to the above reasons, the economy of Sri Lanka collapsed due to an unprecedented economic crisis.

?Considering the above adverse development, every country started facing rising inflation. Most central banks aggressively increased bank rates of interest to tame inflation, the action underscores growing economic concerns about the highest inflation since the 1970s. ?Consumer sentiment at record lows. Commodity prices near all-time highs along with high insidious progress of the inflation has, at a minimum, changed the economic condition, and significantly reset the path of global and national economies worldwide for the long run. An increase in core banking rate by central banks raising rates are expected to ease demand and lower prices for two critical components of headline inflation: housing and commodities such as energy and metals. In the past six months, inflation has far exceeded December 2021 expectations. In many countries, actual rates have doubled projections. European countries are particularly affected. ?Asia is seeing a less severe change: Indian inflation is about 7 percent, only a bit above projections; and South Korea is at 5 percent. In China and Japan, inflation remains muted. But, in Sri Lanka, it is out of proportion.

?How does an increase in the Central bank rate reduce inflation?

This April was the 13th straight month in which WPI (wholesale price index)?inflation?has remained in double digits. India’s economy is struggling and prices are rising. This period has also seen the?rupee?tumbling to a record low of 77.73 against the US?dollar. On June 8, the Reserve Bank of India (RBI) hiked the?interest rate?(repo rate) by 50 basis points (bps) to 4.90% — which comes after a 40bps hike in May — in what some economists feel is a belated attempt to tame high inflation.

Lower interest rates might have been helpful to revive a slowed-down economy, but they might have pushed inflation up. Their impact on inflation is visible only after a time lag of months. Higher interest rates, however, will not be appreciated by our already struggling industries. Regarding the effectiveness of interest rate changes on the decision-making of economic agents, the interest rate is a determinant factor in macroeconomic policy-making. The interest rate is affected by many components such as inflation rate, economic stability, and monetary policy.?

???An increase in the prime rate causes drives up the cost of borrowing for all other loan products, like real estate, Retail loans, Personal loans, and revolving debt like credit cards and purchase first and pay later. The impact of macroeconomics as per theory, if borrowing cost shoots up, the purchasing power of consumers decreases which plays a role in the reduction of the demand side. Higher interest rates also slow down production. In short, ??as spending declines, demand will fall and, eventually, so will the price of everyday goods. There is a risk, however. Economists warn the combination of higher borrowing costs, high inflation, and slower growth could tip any country's economy into a recession. So the onus is on the Central Bank's decision requires deep circumspection and analytical analysis as it is walking on a rope. The other tool is to decrease the money supply. The RBI said that the Monetary Policy actions are expected to moderate inflation by reining in demand pressures and inflationary expectations, control financial conditions conducive to sustaining growth, generate liquidity conditions consistent with more effective transmission of policy actions and reduce the volatility of short-term rates in a narrower corridor.

"The risk of recession is higher than before [Wednesday's] meeting, because the Fed expects to hike so much further, and more rapidly regarding the effectiveness of interest rate changes on the decision-making of economic agents, the interest rate is a determinant factor in macroeconomic policy-making. The interest rate is affected by many components such as inflation rate, economic stability, and monetary policy.?Regarding the effectiveness of interest rate changes on the decision-making of economic agents, the interest rate is a determinant factor in macroeconomic policy-making. The interest rate is affected by many components such as inflation rate, economic stability, and monetary policy.?

?Housing prices steep rise even before the spiraling inflation wave of 2022, because the pandemic incited an enormous real-estate rationalization. Here we show the rise from 2020 to 2021. House prices soared well past expectations in a fairly global phenomenon. In Europe, Turkish homeowners saw the biggest gains, followed closely by those in the Czech Republic and Lithuania. In Asia–Pacific, New Zealand and Australia notched big gains. In North America, the United States and Canada both benefited from the surge; Mexico did not.

?Thus consumers spend less; the demand slows down, thereby controlling inflation. If the RBI decides that the economy is slowing down -that demand is slowing down-then it can reduce interest rates, increasing the amount of cash entering the economy (consumers/business).?The regulation of the money supply and interest rates is done by a central bank, such as the Reserve Bank of India and the Federal Reserve Board in the U.S., in order to control inflation and stabilize the currency.?Interest rates measure the price of borrowing money. If a business wants to borrow Rs 1 million from a bank, the bank will charge a specific interest rate that will usually be expressed in terms of a percentage over a given period of time. For example, if the bank loaned the money to the company at a 5% annual rate, the company would need to repay Rs. 1,050,000 at the end of the year. From the company's perspective, the value of that Rs 1,000,000 right now is greater than the Rs 1,050,000 in a year (presumably because they have plans for the money), which is why they want to borrow it. For the bank, it is earning a 5% return on a one-year investment.?Investors often say that in inflationary times, the best place to invest is in commodities. That’s of course because commodity prices reflect the demand for raw materials needed for economic expansion. Even economic stimulus stimulated the global economy that had been stabbed by the COVID-19 pandemic, prices took off. But ?Russia’s invasion sent prices higher still. The biggest rise was in fertilizers. Spurred by shortages of natural gas, a key component in making fertilizer, and by rising demand from farmers, fertilizer prices rose sharply. A brewing food crisis.?The liftoff in fertilizer prices, along with other fallout from the war in Ukraine, has pushed prices for basic foods much higher. Since 2021, food prices have risen to their highest level since the United Nations’ Food & Agriculture Office began its index. Prices today are considerably higher than in past surges in 2008 and 2011, which were precipitated by the turmoil of the global financial crisis. In the decade since prices have moderated considerably. But they turned sharply higher in 2021, with supply chain snags, drought, and other forces at work. And the war in Ukraine has lifted food prices to a historic high level. From the components of inflation two of its most critical effects on the global economy, starting with wages. Real wages had flatlined for many years in the biggest OECD economies. Just before the pandemic, real wages moved powerfully higher; tightening labor markets gave workers the upper hand in negotiations. The pandemic radically altered the equation, of course. As economies stabilized and reflated, real wages began to creep higher again. But rampant inflation checked that growth, rising so fast that it has diminished the purchasing power of people’s take-home pay. For example, workers in the United Kingdom today have seen their real compensation fall by roughly 8 percent year on year.

?THE CHALLENGES BEFORE THE CORPORATE CHIEF EXECUTIVE

?Few chief executives have faced the challenge of leading a company through an inflationary spike but not like emerged recently. They have to learn from their past peers in tackling this situation. No single action will solve the problem, so they have to take multipronged decisive measures.

In the first months of 2022, it became increasingly visible that this year and next (maybe longer) inflation rates will be well above the approximately 2.0 percent that planners have come to expect (and central banks have targeted) will prevail. The consumer price index rose by 8.5 percent from March 2021 to March 2022 in the United States, a 40-year high, 7.5 percent in the eurozone, and 7 percent in the United Kingdom. Some 60 percent of advanced economies grapple with year-on-year inflation above 5 percent. Russia’s invasion of Ukraine, and the resulting disruptions to the energy, agriculture, and minerals markets, have made it likely that inflation will be higher and more persistent than even revised expectations suggest. For starters, it’s important to recognize that the CEO’s attention can not be restricted to inflation’s adverse impact on profit margin. This volatile daily change in the operating uncertain environment, with a much wider range of stakeholders, means that leaders must think about performance in much broader terms. The rapid decisions CEOs had to make in recent weeks about operations in Russia are only the latest example of these expanded considerations. CEOs must lead with the complete business cycle and their complete slate of stakeholders in mind. External relations professionals can help stakeholder management, but there are many conversations and decisions where only the CEO can lead.

?Inflation management comes out a vital role in sustaining

?The CEO is an organization’s ultimate integrator as the pivotal role that chief executives play in setting a clear direction, aligning the organization, managing stakeholders, and serving as “motivator in chief.” The best CEOs act firmly but also operate from core mindsets that often belie the classic image of the hard-charging executive: they approach important decisions by listening first, treat “soft” culture topics as hard material advantage, empower employees, and ask questions constantly. C companies demonstrated their ability to reinvent themselves more quickly and thoroughly than they had once thought possible. They can do that again. Leaders will motivate their organizations to raise the profile of design to a C-suite topic.?

Reformat product and service offerings for value and availability

?CEOs know that design choices for products and services are critical for responding to the volatility of commodities, the scarcity of components, and higher production and servicing costs—all while maintaining the core functionality customers require. This agile approach that best-practice operators across sectors have used: Rapidly redesign products and services to adjust to new realities.?One industrial-technology company redeployed more than 50 percent of a single unit’s engineering capacity to rapidly redesign products so that they used semiconductors available in the market. Automotive manufacturers facing semiconductor shortages “de-featured” products to maintain production and sales in the face of these shortages.?Faced with historically high costs for lumber and other inputs, a manufacturer redesigned many products to customize that overseas manufacturers could reliably meet. Therefore, ?it lessened its necessity on high-cost regional suppliers—and histrionically simplified its product portfolio. With transportation costs increasing rapidly, so is the value of loading trucks and containers efficiently. A manufacturer used its engineering expertise and tailored digital tools to completely rethink packaging and the loading of packages. It reduced costs significantly as a result of reduced freight demand.?Consumer-packaged-goods companies identify product substitutes—often private-label equivalents that can be sold at lower costs than branded products. These substitutes maximize margins and increase the value to customers.

Mobilizing cross-functional expertise to quickly identify and implement alternative solutions to product and specification challenges will be the key for companies that require solving scarcity and the impact of inflation. Promoting innovation and rewarding the organization for taking risks counter to typical incentives. It may be that the CEO’s most difficult task will be convincing investors to accept resiliency as the new table stakes.

Development?of ?robust ?digital, integrated, transparent, and agile supply chains

Well before the invasion of Ukraine in February 2022, new tariff regimes and increasing shipping and trucking rates that emerged during the pandemic had almost found an inadequate old measure that made cost optimization the primary goal of managing supply chains.

In 2021, it was noticed ns with hundreds of supply chain leaders found that an overwhelming majority had problems in their global manufacturing and supply footprints. Global shipping costs have risen significantly. In response, many companies moved to increase inventories and find new sources for raw materials. But far fewer have successfully tackled such difficult tasks as reducing the number of SKUs and diversifying their manufacturing base. The global response to Russia’s invasion of Ukraine means that supply chains are further strained: air carriers are using alternate, often less-direct routes because of airspace closures, shipping companies are suspending activities near the conflict zone, and many multinationals are scaling down or stopping operations in Russia. The logistics of carriers and gnarly supply chain topics had once been the exclusive domain of backroom spreadsheet managers.

It is understood the location of their tier-one suppliers and the key risks those suppliers face. hat matters because many of today’s most pressing supply shortages, such as semiconductors, happen in these deeper supply chain tiers and can be solved only by understanding industry dynamics at the “tier-n” level. Thus, it is expedient to gather the data required to create this n-tier mapping and prioritize suppliers by the importance to their business. Depending on a company’s sector and needs, it is to be factored in a range of risks, including those involving finance, regulation, reputation, and data security. Operational-risk management is particularly important: examine the vulnerabilities inherent in the concentration of suppliers in the same area, the visibility of operations and processes, labor, manufacturing, and delivery.

The urgency to make seamless end-to-end planning

End-to-end planning involves the supply and demand side, and the financial implications of increased transportation, energy, and materials costs on working capital must be studied. ?The reorder points and stock of critical materials in inventory have to be reviewed. Production programs must be reprioritized in the event of foreseeable scarcities. All these measures demand investment for which there needs to be a return. The hardest difficulties may be persuading investors to accept resiliency as the new table stakes and to change their view of expected risk-adjusted returns. Fortunately, digitalization will likely play an important role in answering these questions, and digital efforts often pay back their costs in 12 months. To empower their procurement organizations can raise the bar on value-creating contributions.

Renovate procurement to create value, not just cut costs

Over the last two years, critical supplies have been scarce or even unattainable at any cost within needed lead times. Prices for nearly all supplies have been rising in tandem globally, and labor market disruptions have affected nearly everyone. Procurement leaders have continuously informed us that this is the toughest market environment in at least 20 or 30 years. New and changing circumstances have upended decades of procurement practices and management capabilities honed to globalization and just-in-time deliveries.

A process has been started to identify that purchasing leaders can be fully equipped strategic partners?by expanding their focus from the cost of goods sold (COGS) to creating value and helping the enterprise succeed. In response to these needs, procurement leaders have implemented, in weeks, actions that previously would have taken months and years. Some examples, Expanding focus to “everything is in play.”?In response to the scarcity of contracted labor and higher prices from suppliers, the supply chain team of one electric utility partnered with procurement to redesign end-to-end engineering and construction workflows. This change tightened governance, maximized demand, simplified requirements, changed how work was allocated, and put in place new contractor management processes. These moves all helped to ease inflationary pressures. .?An industrial manufacturer faced across-the-board cost increases from suppliers. In response, it documented every such rise in fine-grained detail to better understand the exact cost drivers of each product or service, to improve internal cost models, and build better contracts indexed to the right commodities and input costs.

?Facing challenges to product deliveries from Asia, one electronics manufacturer increased sourcing of production in the United States and Mexico. Another purchased its own fleet of aircraft to deliver products from Asia to end-user markets.?Retailers are making acquisitions to control value chains for key products. Automotive manufacturers are contracting directly with foundries to reserve capacity. Energy producers and utilities are exploring investments to onshore the manufacture of key production components for renewable energy. Citing an example from law firms, a mining company shifted its technical-services contractors to 15-minute increments for billing and gave them the technology needed to track their time. By minimizing the rounding up of hours, the company saved 5 to 8 percent of costs across contractor trades. Empowering procurement leaders who are uniquely positioned to integrate a deep understanding of the business with supply market insights. These leaders can play a more central coordinating role across operations, finance, commercial, and other functions and thus help the broader enterprise become more efficient and resilient.?

Employee wages and benefits are one of the business’s biggest costs. Wage increases put pressure on a company to maintain margins potentially by increasing prices. At the same time, wages and benefits are one of the most important levers employers have to attract and retain employees and help them ensure that they can provide for themselves and their families in a higher-inflation environment. inflation and kept eurozone wage inflation thus far in check. Differing labor market policies and conditions have led to a broad dispersion in wage growth around the globe. In a tight labor market, the departure and mobility of workers create wage and inflation pressures as companies compete for workers.?To know the rate of increasing attrition rate, the executives trying to play the new talent game. People who voluntarily left their jobs without having another in hand cited factors such as uncaring leaders, unsustainable expectations of work performance, and a lack of career advancement. In the current labor market, employees believe they can find work whenever they are ready for it. To rebuild relationships and retain current employees while attracting new ones, CEOs must guide their companies to take a new approach to talent, focusing on the following core principles

Retention of talent goes far from just compensation and benefits

Market compensation and benefits packages are just the ante.?To attract and retain?disheartened employees, not just require just high value of cheque but also seek that to be successful. Leaders must simultaneously pay constant attention to both compensation and cultural factors. There is no one right way to reimagine compensation; some trial and error will be involved. With pay transparency at an all-time high, companies run the risk that a salary misstep could prompt even more departures. It needs out-of-box thinking.?employees find a sense of purpose and belonging that can make it more attractive to join and, ideally, more conducive to stay. Subsidizing services such as childcare, in the office, or in a hybrid setting, could go a long way to assist employees with some of the competing demands of work and home.

There is an urgent need to empower their management teams to shift focus to anticipating and addressing the concerns of employees by fostering a sense of inclusion, psychological safety, and community? Frontline managers may be encouraged to try scheduling, staffing, and hiring innovations. Some companies have tried offering “well-being” bonuses to employees or providing them with extra days off for professional development or mental-health breaks. ?In the United States alone, more than 80 million people already in the labor force (either working or looking for work) don’t have four-year college degrees but have or can develop the skills that employers need to get the job done. These include students, part-time or contract (or gig) workers, people in one-person start-ups, and people who are not actively seeking a traditional job at a traditional employer but might want jobs under the right conditions. And this could be the moment to bring back the record number of women?who left the workforce during the pandemic. To reach these women and men, companies must actively challenge the barriers to entry, rethink role requirements, and change the process of searching for employees. A CEO can signal the importance of these new possibilities by taking a lead role in reporting the feedback the organization is hearing, transparently setting the goals and aspirations for change, and directly participating in important hiring and retention activities with employees. Forging new pricing relationships with customers will prove ?their role as the “ultimate integrator.”

Fix prices to strengthen customer relationships

It’s a fundamental question in inflationary environments is about the pricing. As costs surge, repricing to sustain margins is nobody’s idea of a good time; it is typically unpleasant for companies and worse for customers. But CEOs have a chance to reframe customer relationships strategically?to forge deeper relations with customers repricing as an opportunity.?Companies that consistently address total customer and product profitability are likely to weather inflationary cycles better than those that focus solely on cost changes. A manufacturing company facing a surge in demand for high-cost, low-volume products, for example, lengthened its lead times, especially for custom products with lower margins. Sales teams were trained to explain the new service levels and encourage customers to opt for more standardized alternatives. The result was an overall productivity increase that maintained margins without price increases. Organizations examine their customers’ end-to-end profitability, willingness to pay relative to a comparable peer set, and the margin performance (at a product and service level) expected from price changes. Retailers have long used personalization tools to tailor promotions; B2-B companies now have dynamic segmentation tools that allow them to do the same.?Raising prices in response to inflation is seldom a one-and-done move; it is full of unintended and unexpected consequences. Companies that manage price increases well often have a council of cross-functional decision-makers who can respond quickly to feedback from customers and markets.

Taking advantage of the opportunity to forge new pricing relationships with customers in a higher-inflation environment will test many CEOs in their role as the ultimate integrator of the enterprise. Keep inflation high on the company’s agenda with regular communication and role modeling, particularly with the leadership of sales and the frontline sales teams. Keep one eye on short-term margins and price fluctuations and the other on strengthening ties with customers and communicating value more effectively. Achieving a focus based more on strategic action and less on firefighting requires steps that only the CEO can take.

Separate department to prepare an effective strategy

Managing the implications of inflation across a broad operational landscape calls for a cross-functional, disciplined, and agile response. During the pandemic, many CEOs instituted response nerve centers., flexible structures with enterprise-wide authority to coordinate the response to and return from the pandemic and to test approaches to recovery. Similarly, some companies erected inflation nerve centers to manage the potential downside of inflationary pressures by breaking down silos, enhancing transparency between functions, and concentrating on the crucial leadership skills and organizational capabilities required to get ahead of events rather than react to them. Failing to coordinate across functions can have expensive consequences. A company that relied on monthly meetings among supply chain, operations, and procurement teams needed more than 30 days to decide on its action plan to counter inflation. Then, an additional 30 days were required to execute. During those two months, raw-material prices increased by almost 50 percent. Monthly business reviews or quarterly supplier workshops are not enough to handle fast-moving price changes, fluid negotiations with suppliers and customers, and the internal adjustments such pressures require.

Thus, CEOs should opt for a more proactive, durable management office for their inflation program. Such a center can benefit the entire enterprise by improving the pace and quality of its decision-making and helping it to focus more on strategic action and less on firefighting.?Insisting on a systematic, fact-based approach to transparently track execution, diagnose wins and losses, correct course, and learn

A nimble, well-informed decision process can keep up with rapid change by making it clear when certain thresholds are met and generating responses to problems. Many companies will find that they have most of what’s needed to create such a center. These resources can be organized to form an agile capability in a few weeks rather than months or years. With the inflation program management office up and running, CEOs can be freed from the day-to-day details of the anti-inflation effort to focus instead on the issues they are uniquely positioned to address, from the higher-level board and stakeholder discussions to shifting their strategies to best capitalize on the current environment. Someone, somewhere, pays for every uptick in inflation. Customers pay at the end of the supply chain in higher prices. Suppliers pay when their customers de-risk production by seeking alternatives to their products. Shareholders pay higher costs as the ante for competing and maintaining a viable business. With the right playbook as a guide, the best CEOs will successfully manage the impact of the current higher-inflation environment and establish a new level of organizational resilience no matter where prices move next. Leaders can look across their organizations for opportunities to mitigate the effects, helping to build resilience along the value chain they present an opportunity to improve pricing.

CONCLUSION

The most disturbing trend for an economy is inflation. It requires the role of everybody who is trying to stabilize the economy, remove uncertainty, provide managers to resubmit the compensation package, and conducive environment for working in the workplace. Combatting inflation is the primary concern of the central banks, promoters, all stakeholders, employees, and last but not least job satisfaction and ancillary business. ?