Tackling Inflation and Rising Supply Chain Costs with Supply Chain Finance

By PJ Bain • Published March 30, 2022 • 4 minute read

The global economy is facing record inflation, and no company is exempt from the rising costs that are a result. In January 2022, U.S. inflation accelerated even further – reaching a 40-year high as the Consumer Price Index posted an increase of 7.5 percent.

The big question for many businesses is if and when the trend will reverse. Central bankers anticipate inflation will fall to 2.6 percent by the end of 2022, and again down to 2.3 percent by the end of 2023. While encouraging for forward projections, the anticipated relief is not soon enough for many businesses.

Supply chain costs are soaring. From raw materials and infrastructure to labor and 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, labor – that give the highest payer a clear market advantage.

PrimeRevenue’s conversations with customers and prospects reflect the market data on the increasing impact of inflation – particularly in the food and beverage (F&B), automotive and construction sectors. In a recent survey of F&B industry executives by tax, audit and advisory firm Mazars USA, rising commodity and other costs are the top external concern. A new analysis by the Associated General Contractors of America revealed the price of construction materials jumped nearly 20% in 2021. In automotive, the raw material cost increase for an average U.S. vehicle is downright staggering – 87% – according to a Bank of America Global Research report.

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 destabilization are having negative impacts on global supply chains from rising fuel prices to erosion of shareholder value amid declining stock market performance.

And then there are interest rates. On March 16, the Fed announced the first raise in interest rates since 2018. Six more hikes are planned through the rest of the year, and the general assumption is it’s time to take the training wheels off the economy. 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 and labor 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. Ones that unlock liquidity that already exists in the supply chain and provide a debt-free alternative to borrowing at higher interest rates. They need solutions that optimize cash flow and uplift financial health rather than provide temporary improvements at long-term expense.

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.

Learn how you can strengthen financial health with supply chain finance:

7 Financial Metrics Strengthened by Supply Chain Finance