CFO Survey


Future scenarios: Are CFOs too worried about inflation—or not worried enough?

CFO Insights

In this edition of CFO Insights, we’ll present four potential scenarios of how inflation might unfold over the next three years. And we will ask what finance leaders can do to prepare their organizations to be resilient no matter what the future of inflation holds.


As CFOs watch inflation numbers rise month after month, so may the intensity of their concerns. Now that it has climbed to an altitude unseen for 40 years, they may be tempted to assume that it is bound to go even higher.

But what if the picture we have today isn’t a reliable guide to what’s ahead? What if by next year inflation is trending down? Or maybe even has dropped into disinflation, with the Consumer Price Index hovering between 0% and 1% as a result of a faster-than-expected resolution of supply chain disruptions combined with diminished consumer demand.

As far afield as that may sound, such a situation is among the four scenarios that Deloitte economists have drawn up to help CFOs prepare for the future. While the disinflation scenario may be the most surprising of the bunch, none of the four are regarded as extreme or on the margin—as would be the case if, for example, predictions included references to deflation (CPI below 0%) or wage and price controls.

Of course, that leaves plenty of room for uncertainty about what’s ahead in an economy where the inflation rate has risen to 7% (the highest 12-month rate since 1982),1  unemployment has dipped to 3.9%,2  and the Great Reshuffling rages.3

Not surprisingly, CFOs are taking a watch-and-worry approach. In Deloitte’s fourth-quarter 2021 CFO Signals™ survey, three-quarters of the 130 respondents cited inflation as a top concern. A slightly larger proportion, 76%, of surveyed CFOs indicated that their organizations would offset increases in input costs by raising some prices (see sidebar, “Navigating inflation with pricing actions”).4

While that may help restore profit margins, it won’t tame inflation. The knotted-up supply chain, still suffering the effects of COVID-19-related port shutdowns and factory issues, has reduced the volume of goods if not, until recently, dented demand for those goods. If supply chain issues resolve themselves, what happens then? Do we return to “normal”—meaning unfettered globalization? If inflation keeps rising, which entity takes the lead in controlling it: the Federal Reserve (monetary policy), the government (fiscal policy), or corporations?

Most of today’s CFOs have only worked in an environment where ultra-low interest rates have encouraged business investments. But a new setting may require CFOs to change their thinking. In this edition of CFO Insights, we’ll present the potential scenarios of how inflation might unfold over the next three years. And we will ask what finance leaders can do to prepare their organizations to be resilient in areas including human capital, pricing, and real estate.

Vested interest

By most measures, the US economy appears to be robust. GDP rose at an annualized rate of 6.9% in the fourth quarter of 2021.5 Unemployment is at its lowest since the pre-pandemic days of February 2020. But CFOs have watched as inflation has spread across a broad range of inputs (see Figure 1 in PDF). Throughout 2021, economists debated whether it was a temporary phenomenon. US Federal Reserve Chairman Jerome Powell ceased using the word “transitory” to describe inflation only at the end of the year, when the Fed vowed to deploy its “full range of tools” to hold inflation “at the rate of 2% over the longer run.”6

In the fourth-quarter 2021 CFO Signals survey, three-quarters of CFOs said they expected the Federal Reserve to raise the target interest rate for US federal funds to range between 0.26% and 1.0%. As far as the timing of the first rate increase, 46% of CFOs expected it to occur in the second quarter of 2022.

Responses to that survey were collected in November 2021. Since then, the conventional wisdom—reading the Fed’s signals—has shifted, with expectations that the central bank will raise interest rates three times this year, perhaps starting in March. But no one can know for sure.

In order to help CFOs prepare for a future that no one can accurately predict, we’ve developed a set of scenarios to explore the question: How might inflation evolve in the United States over the next three years, and what could be the impacts on large organizations?

Four scenarios based on current trends and uncertainties

The following four scenarios explore different ways inflation might play out based on evidence and indicators in the US economy today. It is important to note that these scenarios are not forecasts or predictions: they were created to test assumptions, explore possibilities, and clarify what executives may want to prepare for or monitor. They are not exhaustive of every possibility, but they cover much of what economists and policymakers are discussing and executives may need to confront. Finally, while these scenarios focus on the US, they are designed to be broadly applicable to most other global markets (other than those currently facing a very different inflation dynamic, such as Türkiye).

  1. Blue Skies: Current inflation is temporary and reverts to recent historical norms (about 2%) as supply chain disruptions settle during 2022 and consumer demand rebalances between services and goods. With the pandemic ebbing, individuals re-enter the workforce, stabilizing the labor supply. The Fed’s response: limited and gradual interest rate increases.
  2. Sun Showers: Inflation settles between 3% and 4% through 2024 as supply chain disruptions persist and the labor supply remains somewhat constrained. Firms and consumers adjust and growth continues, albeit unevenly across industries and players. Consumer spending and economic activity remain stable, but also stay skewed toward goods versus services. The Fed’s response: moderate due to weakness in the labor market.
  3. Stormy Weather: Inflation rises to between 8% and 9% as it becomes embedded in worker expectations and a wage/price spiral takes off. A sluggish economy dampens both consumer and business spending. Existing supply chain issues deepen, exacerbated by new COVID-19 strains. The Fed’s response: sharply raises interest rates to put the brakes on inflation—which triggers a recession in 2023.
  4. Downdraft: The US economy experiences disinflation (with inflation levels between 0% and 1%) fueled by a faster-than-expected resolution of supply chain disruptions coupled with diminished consumer demand as pandemic savings are spent down. Low growth not only dampens corporate profits, but also raises unemployment. The Fed’s response: keeps interest rates at historic lows, while exploring increased bond-buying activities.

The road ahead

There are also actions CFOs may want to consider that can be beneficial no matter the future direction of inflation. These include:

  • Shoring up capital structure. Rebalance portfolios and lock in today’s cost of capital in anticipation of interest rate variability.
  • Addressing supply chain disruption proactively. Focus on building a well-diversified supply chain with enough slack to weather uncertainty.
  • Building for continuity. Invest in systems that enable smooth operations in periods of high labor turnover (e.g., training capabilities, automation).
  • Considering smart hedges. Make strategic decisions about where to hedge (e.g., prebuying raw materials) considering areas most susceptible to destabilization.
  • Developing a strategic market-sensing function. Build internal capability to monitor how the future is evolving to trigger deployment of contingent strategies and hedges.

In addition, finance executives seeking to build resilience across these (or other) scenarios might consider various ways to identify specific options and risks for their business or industry. These actions can include convening cross-functional executives to examine the implications of the scenarios for the business and determine potential strategies and hedges across scenarios; delving into inflation implications for a key functional area for the business (e.g., supply chain, M&A) to identify specific opportunities and risks; and conducting market sensing to identify key signposts/indicators to proactively monitor which scenario may be coming to pass and adjusting plans accordingly.

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