Time to dust down the inflation tool kit?

In December 2020, The Economist (a weekly newspaper) said ‘a surge in inflation looks unlikely. But it’s worth keeping an eye on’. Six months on, the spectre of inflation is still with us. However, the issue for treasurers isn’t whether high inflation will come back, it’s whether they are ready for it if it does. So is it time to dust down the inflation tool kit?

We polled our peer group of senior treasury professionals from MNCs and found that although treasurers are clearly concerned about inflation, with eighteen per cent currently making impact  assessments and eleven per cent believing their treasury is prepared, a majority (53%) of them have not (yet) explored how inflation will impact their treasury operations. 

Inflation hasn’t been a major issue since the 1970’s and since then a lot more has changed for treasurers than the width of their trousers. Today’s treasury technology can deliver real time transactions in stark contrast to the highly manual, pre fax machine, processes of the past, but the challenges inflation presents to treasurers remain the same. This time, if we get inflation, it will come at a time of massive debt leverage – at least for some people, so a rise in interest rates could be very painful. Others, with low fixed rate long term debt will benefit from higher returns on cash investments so they are less concerned. But frequent price rises and the associated FX volatility will impact everyone. 

Damian Glendinning, chair of the CompleXCountries advisory board and former treasurer of Lenovo commented ‘ The markets are clearly concerned about it, even if the politicians and the experts are telling us there is no problem. As we all know, markets can be wrong – but so can the experts, and it has been known for politicians to say things which are not strictly true. In any case, a prudent treasurer would be well advised to look again at how they handle inflation, to make sure they do not get caught out, if it does happen’

The CompleXCountries treasury / inflation poll results 

On 23rd June 2021, we asked members of the CompleXCountries  treasury network (38 responses from MNCs operating in an average of 80+ countries) about their level of concern regarding possible inflation. Here is a summary of the results.

Which of the following best describes your concern regarding possible inflation?Response 
1. Concerned and treasury is prepared11%
2. Concerned and making impact assessments/contingency plans in treasury18%
3. Concerned – but no current action53%
4. Not concerned8%
5. Don’t believe inflation will cause any problems5%
6. Not something we have considered5%

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