Inflation and its impact on medium-sized companies

The eurozone's year-on-year inflation rate stood at 9.9% in September, marking a new all-time high, which in turn represented an acceleration of eight tenths of a percentage point compared to that recorded in August. One tenth of a percentage point below the first estimate of 10% published by Eurostat. In the European Union (EU) as a whole, the year-on-year inflation rate in September rose to 10.9% compared to 10.1% in August. In the case of Spain, the harmonized inflation rate in September stood at 9%, compared to 10.5% in the previous month, so that our country would have achieved a favorable price differential with respect to the Eurozone of nine tenths of a percentage point. As for the increase in eurozone prices, September saw a generalized rise.

Energy prices, which continue to be the main drivers of the rate, rose by 40.7% in the ninth month of the year, compared to the 38.6% increase observed in August. Meanwhile, fresh food prices rose to 12.7%, up 1.7 points from 11% in the previous month.

Services recorded inflation of 4.3%, up five tenths of a point, while non-energy industrial goods rose four tenths of a point to 5.6%. Our firm, Grant Thornton, has prepared a report that reveals concerns about rising energy, transportation, tax and equipment costs, which are at or near all-time highs around the world. This analysis gathers information from medium-sized companies in 28 countries from which an average increase of 21% in the prices of raw materials in the last year and 20% in energy and transport costs can be extracted. As for banking and interest costs, they have shot up by 16% and tax bills have risen by 17%. These continuous price increases are breaking the established trade rules and the trend indicates that they will continue in the short and medium term. The World Bank, along with other agencies, compares the price increases to those that occurred in the 1970s, when economic growth was also low. In this increasingly hostile environment, it is necessary for medium-sized Valencian companies to consider measures to survive in a crisis scenario. But to do so, it is necessary to adapt.

Grant Thornton offers a series of practical tips for dealing with the perverse effects of inflation. First of all, it is necessary to identify and mitigate the risks of inflation for the company. Very few companies internationally have plans in place to manage high and prolonged inflation, so it is necessary, in this scenario, to identify the risks and develop a plan to combat them. In this regard, it is worth considering measures to limit the increase in external costs, including price fixing, bulk purchasing, renegotiation of terms and conditions with suppliers or changing suppliers.

In a high-inflation environment, these decisions can make a difference in limiting costs and protecting margins. In addition, outsourcing services to reduce costs can also be a good alternative for companies. It is also important to review the company's pricing strategy in relation to rising costs. The company, in this case, should do an exercise among its customers to be able to justify a possible increase and see in which parts they can save costs with respect to their customers. In addition, it should be borne in mind that not only are raw material costs rising, but also capital costs, as interest rates rise to contain inflationary pressures. Companies need to optimize their capital costs and consider increasing or reducing the level of working capital to meet their needs.

At Grant Thornton we advise our clients on financial and accounting matters to mitigate the effects of inflation and help companies cope with this turbulent financial climate.