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.

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.