Duran Duran are back touring in both the UK and the US and their timing could not be better. They are on the road to celebrate the 40th anniversary of their breakthrough second album Rio and in so many ways it feels like we are back in 1982 again. We are experiencing rates of inflation which we have not seen since the early 1980s. There is a level of conflict between western capitals and the leadership in Moscow that has not felt as intense since that period either. To top the comparison off, 1982 also witnessed an immensely disruptive series of train strikes creating massive inconvenience.
Inflation has proved the real surprise package. Even the very few who predicted that there would be serious upward pressure on prices due to the measures taken by central banks throughout the world in response to the covid pandemic did not anticipate that rates would be so high, or across such a wide range of goods, or that it would be flamed by the first state-on-state war in Europe since 1945. The estimates for the figure where it might peak in the UK, like the cost of living itself, keep rising. At the beginning of this year, 7% was the expected height. It now seems like 11% or 12% is the number.
That overall figure masks the extent to which individual components of costs have increased even more sharply. The obvious villains of the piece are gas prices (up an unbelievable 233% between January 2020 and June 2022), electricity (up 101% in the same period) and oil (up 77%). Yet they are hardly alone. The cost of eating is about to go through the roof with the price of wheat having risen 111% in the past two and a half years with corn not far behind at 100.8%. This is the direct result of the Russian invasion of Ukraine which has made it impossible for Kyiv to continue to serve as not only Europe’s breadbasket but the primary source for much of Africa as well. What you wear is also taking a hit with cotton up 103.7% since January 2020 as well with the cost of linen not far behind it.
The basics of life have also become more expensive even if not quite on the same scale. Coffee is up by 57% since January 2020. Sugar by 48.9%. Butter by 44.5%. Cheese by 30.6%. Milk is up by 29%. The sole consolation for anyone who likes breakfast is that orange juice has fallen by 29.8% but it is a rare exception to the inflationary rule and besides which it would be a challenge to reorganise life to make orange juice the dominant feature in the diet of the typical human being (and Bucks Fizz is not a bargain as the Chinese appear to have commandeered much of the world’s champagne stocks).
All of the above has enormous implications for those in senior roles in business, with FDs facing a set of challenges like few others with the prospect that these problems may be very hard to resolve.
The first of these is simply the experience gap. With the possible exceptions of Warren Buffett and Rupert Murdoch, absolutely no one at the helm of a major company today was in a similar role back in 1982. Indeed, a very large percentage of corporate leaders in 2022 were still in university or even school four decades ago. There is virtually no collective memory of inflation or how to respond to it. It was, until recently, thought of as something strange associated primarily with the 1970s – like kipper ties and flairs – which had long been confined to the history books. There might have been glancing references to it in business school courses but that would have been about it. So, people at the top will have to adjust to something which, entirely reasonably, they will not have planned for. Absent a Tardis to take us back to 1982 to swot up this will inevitably be a matter of trial and error.
Second, it is extraordinarily difficult to divine how long this inflationary surge will be with us. Is it to be thought of principally as a post-pandemic phenomena which will work its way out of the system soon rather than later? Or are energy costs destined to escalate throughout the decade as Russia digs in for a long slog in the Ukraine and the outside world endures a painful and costly switch to alternative suppliers of oil and gas? This is especially difficult for UK business because there is no equivalent of the price cap for domestic consumers which has afforded a degree of protection for households and market failure is rife in the electricity and gas bills imposed on companies. How on Earth will many businesses be able to create remotely credible three-year plans moving forwards when it is very hard to work out where inflation levels might be. Should one assume a return to about 2% by 2025 or will 10% have become the new normal? And which poor individual on the board will be expected to somehow come up with some numbers in this fog of uncertainty? It will be the dear old CFO or FD who will doubtless find themselves having to engage in scenario planning when the array of plausible outcomes is far too wide to allow for conventional rational calculation.
Finally, as inflation bites so will the response of employees. The RMT may be an extreme example in that it appeared to wallow in strike threats on any issue which took its fancy even when inflation was virtually negligible, but more normal people will notice that energy costs have become crippling, the price of filling a car up with petrol has reached eye-watering levels and the supermarket shopping bill now involves numbers of a size ordinarily associated with the Turkish Lire. If the Bank of England continues to edge interest rates up then in time that will have a serious effect on mortgages as well.
In 1982, all of this could be contained because high unemployment made many people cautious about pushing their luck on pay increases. In 2022, by contrast, the United Kingdom seems to have pulled off the incredible economic trick of high inflation, stagnant growth and yet a larger number of vacancies than the official unemployment figure for the first time since records were collected. The battle for talent is not about to end – indeed there are reasons to think that it will escalate – but the balance of power over terms and conditions may well shift sharply towards the desirable employee.
Much, therefore, for everyone in business but notably the CFO or FD to think about. The world of 2019 now looks a very long way away. If anyone then had suggested that there would be a global pandemic followed shortly afterwards by an inflationary tidal wave and a war on the continent of Europe they would probably have been dismissed as at best eccentric and at worst barking mad. The idea that 2022 would be 1982 revisited would have been considered laughable. But here we are with Duran Duran set to embark on their prophetically named Future Past tour for American audiences. Their biggest hit single in this country contained the chorus line “Please, please tell me now. Is there something I should know?”. There will be plenty of people sitting in boardrooms in 2022 who will be asking themselves essentially the same question.