Treasury Implications of Inflation’s Extended Run
Corporate treasurers are starting to feel the heat in their cash management policies as heightened inflation levels persist. Understanding the driving forces behind the current rates globally is key to gaining an insight into how long the situation may persist and whether treasurers need to be making short- or longer-term plans to manage the impact on corporate cash.
Inflation emerged as one of the key financial concerns facing corporate treasurers, central banks, and society as a whole towards the end of 2021. While not threatening to reach the runaway levels of the 1970s, inflation is currently elevated, particularly in the US, UK, and Europe.
Average inflation in the US since the 1920s has been in the region of 3%, while US Bureau of Labor Statistics data for January 2022 showed it had hit 7.5%. Although not quite as extreme, a similar story has played out in the UK and Eurozone. Since the 1920s, UK inflation has been at an average of 2.5%, while the Office for National Statistics’ data for January 2022 saw annual inflation at 5.5%, a rate that’s likely to increase in the first half of 2022. While the Eurozone has a lower historical average of 1.3% inflation, its January 2022 reading saw inflation hit 5.1%, according to data from Eurostat.
Drivers of inflation
The initial rise in inflation last year had been anticipated, as the extraordinary circumstances caused by the onset of Covid-19 in the spring of 2020 skewed the year-on-year data comparison in 2021. Many central banks repeatedly described the rise in inflation as “transitory”, anticipating that as the annual data worked through the monthly reports, inflation would fall as naturally as it had risen. However, by Q4 2021, it became clear that this was not the case. The elevated level of inflation was not going away in a timely manner as anticipated. Federal Reserve Chair Jerome Powell even told the Senate Banking Committee in November 2021 that “it’s probably a good time to retire that word [transitory]…”