Inflationary pressures remain an obstacle to rate cuts


Resilience blunts the effects of economic uncertainty


Inflation’s hold on the global economy is persisting, according to Grant Thornton International Business Report (IBR) survey data, as central banks  —  particularly in the United States — have failed to see sufficient stability to begin cutting interest rates.


The effects of inflation are seen in the IBR data, showing that more than half (53%) of mid-market business leaders plan to increase prices within the next year. For more than three years, at least half of survey respondents have said they plan to increase prices; for 10 years prior to that, the percentage raising prices was never more than 45%.


Meanwhile, 89% of first-quarter respondents said they will be providing salary increases — the highest mark ever recorded in the IBR. The forecasts of increasing salaries and prices indicate that central bank leaders may struggle as they work to go the last mile in taming the high inflation that jolted the global economy beginning in late 2021.


The U.S. Consumer Price Index soared as high as 9.1% year-over-year in June 2022 before falling substantially to 3% a year later. The decreases sparked a wave of optimism that rates would fall further and spark the Federal Reserve to begin reducing interest rates in mid-2024.


Respondents to Grant Thornton’s most recent M&A pulse survey, conducted early in 2024, were optimistic that interest rate cuts would contribute to a strengthening economy and lead to an increase in deals in the coming months. But that earlier optimism has now been tempered in light of recent data suggesting that inflation is proving more difficult to tame than hoped.


The Consumer Price Index has held fairly steady since June 2023, clocking in at 3.5% in March of this year. Federal Reserve Chairman Jerome Powell said during a Woodrow Wilson Center forum presentation last month that more confidence that inflation is moving sustainably toward 2% before easing monetary policy would be appropriate.


“In recent months, there has been a lack of further progress toward the [Federal Open Market] Committee’s 2% inflation objective,” The Federal Reserve said in a statement on May 1. “The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the long run.”




Managing pricing amid volatility


As business leaders continue their tantalizing wait for rate cuts, customer frustration with higher prices may require growth strategies to be adjusted. Macroeconomic turmoil, such as the high inflation of the past two years, can create opportunities for new market entrants or low-cost competitors to seize market share, said Grant Thornton Growth Advisory National Managing Principal Alasdair Trotter.

Alasdair Trotter

“You need a strategic planning process that allows for regular refreshes based on what the market is looking for.”

Alasdair Trotter

Grant Thornton National Managing Principal, Growth Advisory


“You need a strategic planning process that allows for regular refreshes based on what the market is looking for,” Trotter said. “Be cautious about the assumptions you’re making about the future and be sure to check whether the assumptions you made six, 12 or 18 months ago still apply.”


The price fluctuations in the current environment highlight the importance of a strong data management system that provides leadership with up-to-date cost and pricing data. Companies set prices based on their understanding of the combination of the following factors:

  • The cost to provide their goods or services
  • What customers are willing to pay
  • The desired profit margin for the business
  • How competitors are pricing their products and services

It’s common, though, for leadership to lack a timely understanding of costs, customer preferences and competitor pricing.


“We frequently see organizations run into trouble because the data they rely on to understand their costs is three months or even a year out of date,” Trotter said.


Getting timely data is the first step toward a pricing strategy that can position an organization for optimized, profitable growth.


In the meantime, Trotter said, higher salaries don’t necessarily need to be passed on to consumers and customers.


“It depends on your industry, competitive position and business model, but whether you have to pass on these costs to customers through higher prices ultimately hinges on whether you have other meaningful opportunities to take out cost,” he said. “Technology and automation often can reduce costs, and there also are plenty of creative solutions for workforce retention that can rein in costs, including new compensation models, incentives and stretch opportunities.”


Companies can also discover benefits when they optimize both price and costs by adjusting the bundle of tradeoffs that exists in their relationships with their customers. Many companies in this environment are adjusting their customer services so that each customer gets the exact experience they’re looking for — at the right price.


Sometimes that means raising prices to give the customer something they really care about (for example, next-day delivery, even if it comes with a substantial fee). Sometimes it means reducing prices by removing from the sale a feature that the customer doesn’t really care about (for example, offering a rebate if delivery isn’t needed until next week).


In this way, companies can optimize margin for each customer by making careful tradeoffs to satisfy the unique value propositions they require. Optimizing these services requires an intricate understanding of why your customer chooses your product or service over someone else’s — and how your operations are positioned to meet their needs. With careful adjustments, customer preferences can be precisely satisfied for the desired margins.


“You want to make thoughtful adjustments about the bundle of tradeoffs your customer wants so you maximize your profitability without harming your margin growth,” Trotter said. “When you understand your customers and competitors, you can make those thoughtful tradeoffs.”




Optimism and caution


Despite the economic turbulence, high inflation and hunger for lower interest rates, many business leaders are displaying what Trotter calls “cautious optimism” about the prospects for their own performance. The IBR shows that 66% of mid-market business leaders globally are optimistic about their future prospects. Strong optimism has remained consistent in the survey over the past 18 months, after experiencing a dip in the second half of 2022 following Russia’s attack on Ukraine. Meanwhile, 62% of IBR respondents expect a profitability increase over the next 12 months.


This may reflect the real opportunities that a high-inflation environment presents to many companies. In an inflationary environment, the first instinct is to pass on cost increases to the customer; however, this simply perpetuates the inflationary cycle, so it’s often not the best choice.


While an inflationary environment puts pressure on all companies, in a Darwinian sense, it may help weed out inefficient companies with business models that are not dynamic or resilient enough to balance the demands of suppliers and consumers. As a result, savvy business leaders view difficult economic times as a window of opportunity for leaping ahead of the pack. “To succeed in this time of cautious optimism, we’re seeing clients get really thoughtful about seizing the window of opportunity that is presenting itself,” Trotter said. “They’re being thoughtful about developing strategies that are resilient under uncertainty.”



Alasdair Trotter

Alasdair Trotter is Grant Thornton’s Chief Revenue Officer, National Managing Principal of the Growth Advisory Practice, and a member of the Executive Committee at Grant Thornton Advisors LLC.

Los Angeles, CA

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