Companies must battle the beast of stagflation

By Rachana Shanbhogue: Deputy business affairs editor, The Economist

SIMMERING GEOPOLITICS, outright war, a global pandemic: anyone who has led a business through the ups and downs of the 2020s so far probably feels like they’ve seen it all. Now they must prepare to battle another foe—the two-headed monster of high inflation and economic stagnation. This fearful stagflationary beast last made an appearance in the 1970s, well before most of today’s senior executives had even set foot on the career ladder. How should they respond?

Companies are already having to deal with soaring inflation. Share prices tumbled in 2022 as first one firm and then another warned of eye-watering cost squeezes. Ford reported that its costs in the third quarter of the year were $1bn higher than it had anticipated, for instance—an overshoot equivalent to about 25% of its adjusted operating profits in the second quarter. In the euro area, producer prices rocketed at annual rates exceeding 40% on the back of jaw-dropping increases in energy prices. Yet even as costs surged, consumer demand remained strong, still sustained by generous fiscal stimulus enacted during the pandemic. That helped American businesses’ profits, as a share of GDP, reach a record high during the year.