How Are Clients Responding to Inflation and the Impacts on Their Portfolio?
Inflation affects businesses in many ways, including increased cost of goods, transportation expenses, and higher wages. Lenders closely monitor business’s ability to generate revenue and maintain profit and operating margins. Periods of rapidly rising inflation tend to put downward pressure on all critical metrics, which could inhibit businesses from borrowing more money to bridge their working capital needs.
During rapidly changing economic times, most lenders will re-evaluate the quality of their collateral, including a company’s accounts receivable. They are considering how payments might be affected by reduced sales, increased costs, and in the current market, supply chain disruptions. In addition, as the Federal Reserve raises interest rates to reduce inflation, the cost of credit increases, further impacting business’s bottom line. There is a very real risk the Fed may raise interest rates too far or too fast as there are signs in sectors that supply side pressures are reducing. Companies can adjust pricing, but there is often a timing lag, which might come at the cost of reduced profit. Navigating an economic period with high inflation, increased cost of credit, and supply chain shortages can pose working capital challenges to many companies not accustomed to this stress, highlighting the need for a war chest of capital even for the smallest companies.
In past economic cycles, inflation has led to consumer payments slowing down and default rates increasing and unemployment rising. During the pandemic, consumer delinquencies were lower than historic levels. The current rise in delinquencies is not unexpected given the cessation of government stimulus payments; however, overall delinquency and default rates are still well below pre-pandemic levels. Unemployment is forecast to remain at or below 4% for the foreseeable future, which will help keep delinquency rates in check.
While inflation affects many businesses in different ways, the good news for consumers in the current market is the increase in wages. Perhaps not on pace with inflation, but enough to offset much of the inflationary impact. As long as the job market remains stable, consumer payments should perform consistently at or above long-term historic levels.