Was Inflation Just ‘Resting’?

It appeared to have gone away, giving corporate leaders a chance to anticipate a bold return to a new normal. And a series of rate cuts by the Feds only encouraged the belief that the ugly shadow of inflation was fading.

But according to some prognosticators, as well as a new government report this week, the high inflation of 2022 and 2023 may not have been defeated; it may only be “resting.” Based on historical patterns—as well as economists’ views of the stated priorities of the next US administration—worries that inflation could return are slowly emerging. Should those worries prove well-grounded, “CEOs are undoubtedly going to face very difficult choices,” says Mark Arian, CEO of Korn Ferry’s Consulting business.

No one can predict the future, of course. But based on US data released this week, prices rose higher than expected for three straight months. Inflation is now running at a 3.6% annualized rate, the fastest pace since April.

Multiple bouts of high inflation within a relatively short time frame aren’t unprecedented. In the United States, this last occurred when inflation spiked in the 1960s, dropped to 3% in 1971, then jumped to 10% in 1974. Today, experts say, a double spike in inflation might look different. Inflation began climbing just as companies were catching up to a labor shortage and COVID-related supply-and-demand disruptions. In 2022, average prices rose by 8% in the United States, and by far more in many other countries. Companies were frequently able to pass along their higher costs to consumers. Until recently, inflation had been trending down for about a year.

For leaders, a major concern about inflation is its effect on payrolls, since salary and benefits represent the bulk of costs at most companies. Experts suggest dusting off the playbook they might have used two years ago, when inflation last spiked. “The principles still hold up,”  says Tom McMullen, leader of Korn Ferry’s North America Total Rewards business.

If an organization feels compelled to increase pay during a period of high inflation, McMullen recommends considering a variable-pay program instead of permanent base-salary increases. There are plenty of options, he says, including retention bonuses, special onetime payouts, and referral bonuses.

Inflation also should focus leaders on cutting costs, especially if growth continues to be sluggish, as it has been for many organizations. “I think CEOs who may be reluctant to downsize should strongly consider doing this, in order to maintain margin,” Arian says.

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