The Economist: How To Run Stagflation Business

The Economist headline: How to run a business at a time of stagflation

Subheadline: Chief executives dust off—and update—40-year-old management textbooks

Inflation will stay high for some time yet. On June 7th the World Bank warned that “several years of above-average inflation and below-average growth now seem likely.” A new study by Marijn Bolhuis, Judd Cramer and Lawrence Summers finds that if you measure inflation consistently, today’s rate is almost as high as it was at the peak in 1980. As the past creeps up on the future, “stagflation” is preoccupying corner offices. Today’s executives may think of themselves as battle-hardened—they have experienced a financial crisis and a pandemic. However, the stagflationary challenge requires a different toolkit that borrows from the past and also involves new tricks.

The primary task for any management team is to defend margins and cashflow, which investors favour over revenue growth when things get dicey. That will require fighting harder down in the trenches of the income statement. Although a rise in margins as inflation first picked up last year led politicians to denounce corporate “greedflation”, after-tax profits in fact tend to come down as a share of gdp when price rises persist, based on the experience of all American firms since 1950 (see chart 2). To create shareholder value in this environment companies must increase their cashflows in real terms. That means a combination of cutting expenses and passing on cost inflation on to customers without dampening sales volumes.


Even if they keep revenues and costs under control, ceos are discovering what their predecessors knew all too well: inflation plays havoc on the balance-sheet. That requires even tighter control of working capital (the value of inventories and what is owed by customers minus what is owed to suppliers). Many firms have misjudged demand for their products. Walmart lost almost a fifth of its market value, or around $80bn, in mid-May, after it reported a cashflow squeeze caused by an excess build-up of inventories, which rose by a third year on year. On June 7th its smaller retailing rival, Target, issued a warning that its operating margin will fall from 5.3% last quarter to 2% in the current one, as it discounts goods to clear its excess inventories. Payment cycles—when a firm pays suppliers and is paid by customers—become more important, too, as the purchasing power of cash delivered tomorrow withers in inflation’s heat.

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