The global economy is facing record inflation, and no company is exempt from the rising costs that are a result. Many businesses are experiencing the impact of inflation right now, while others will see a delayed effect. South Africa’s annual consumer price inflation reached 5.9 percent in March, up from 5.7 percent in February. This is above the mid-point target (4.5 percent) and nearly hitting the 6 percent upper limit of the Monetary Policy target set by the South African Reserve Bank (SARB). The consumer price inflation for April will be published on Wednesday this week (18 May 2020).
Supply chain costs are soaring
The big question for many businesses is if and when the trend will reverse. The Reserve Bank anticipates headline consumer prices to peak at 6.2% in the second quarter of 2022. Investec economist Lara Hodes expects “headline inflation to lift to 6% in April and average 6.3% in the second quarter, as supply-side price pressures continue to mount and spill over to core items.” Supply chain costs are soaring, from raw materials, technology and infrastructure, to logistics. The costs to produce and move goods across the supply chain continue to climb. This has been worsened by persistent shortages – semiconductors, raw materials, industrial equipment – which gives the highest payer a competitive market advantage.
Addendum’s conversations with customers and prospects reflect the market data on the increasing impact of inflation – particularly in the agriculture, manufacturing, food, automotive and construction sectors. Cargo Compass, a South African freight, logistics and warehousing company operating worldwide, warns that goods prices will rise sharply in South Africa as supply chain bottlenecks are likely to continue throughout 2022. Resulting shortages will impact on an already fast rising inflation rate.
Geopolitical developments are causing serious concern
Recent geopolitical developments are also causing serious concern. While a relatively minor player in the overall global economy, Russia is a major exporter of gas, oil and raw materials. The ripple effects of regional destabilisation are having negative impacts on global supply chains from rising fuel prices to erosion of shareholder value amid declining stock market performance.
Steep interest rate hikes are expected
The South African Reserve Bank’s (SARB’s) decision to hike interest rates by 25 basis points to 4.25% in March was expected, but there are indications that steeper hikes are on the way. The SA Reserve Bank’s monetary policy committee (MPC) will announce its latest interest rate decision on Thursday and is widely expected to raise interest rates by 50 basis point (bps) to 4.75%. Fixed income markets (FRA’s) have priced in another 2% increase in interest rates over the next two years. All of this will further fuel inflation over the coming months.
For those who haven’t conducted business during a period of high inflation (it’s been a while!), it may seem counterintuitive to increase the cost of lending right now. But it’s one lever central banks can use to throttle back demand for goods which ultimately leads to lower prices. However, it’s a fine line. There’s a real risk of overshooting the goal. Too much tightening can slow down the economy too quickly.
How can buyers and suppliers stay competitive amid higher prices and rising interest rates?
To remain competitive, companies are looking for new and improved ways to position themselves for higher supply chain costs without necessarily passing the full brunt of cost increases onto their customers. They also need tools that will help them shore up financial stability. The next few months will test many businesses as they try to manage inflationary pricing, rising interest rates and the effects of new geopolitical unrest.
Buyers and suppliers need solutions that deliver immediate relief. Supply chain finance is the most effective financial product to achieve that. It can unlock liquidity that already exists in the supply chain and provides a debt-free alternative to other, more expensive forms of borrowings. Businesses need solutions that optimise cash flow and uplift financial health rather than provide temporary improvements with a long-term negative impact. Some of Addendum’s customers save as much as 16% per year when using supply chain finance compared to other forms of borrowing.
Supply chain finance has long been used to help companies navigate economic turbulence. By tapping into liquidity trapped in their supply chain, businesses can flexibly adapt to inflation while minimizing the impact of inflation and rising costs on their balance sheets.
*This article was originally published on PrimeRevenue.com and adapted for Addendum.co.za