Policy & Corporate Affairs

Economic Insight
Slowing growth
and rising prices:
a new era of stagflation?
Today’s economic cycle is different:
global growth is slowing at the
same time as prices are rising.
“Stagflation” is doubly challenging
for business. However, far-sighted
executives can employ a number
of strategies to weather the
storm and unlock future value.
Falling demand, weaker investment, anemic consumer spending – the tell-
tale signs of an economic downturn are already confronting businesses
across Europe, the United States and parts of Asia. But those businesses
that are counting on their previous experience of managing in a
downturn to see them through this time around may need to think again.
This downturn is different. Not only is economic growth declining, but the
major economies are also experiencing a resurgence in inflation, as global
commodity prices are driven up through a combination of emerging-
market demand and changes in international production. Economists have
a word for it — “stagflation” — the combination of stagnant growth and
high prices that bedeviled the industrialized economies during the 1970s.
Stagflation is doubly bad for business profitability — lower growth eats
away revenues at the same time as inflation pushes up costs. Businesses
can, however, counter these pressures in seven key ways:
• Harness a diversified portfolio of output and input markets
• Use analytics to gauge pricing power and areas of new demand
• Revisit brand strategy
• Focus on efficient supply-chain management
• Harness the potential of cost-reducing technologies
• Identify profitable opportunities for backward and horizontal
integration
• Exploit re-pricing in asset markets to acquire assets cheaply

Low growth and price inflation hit 4.1 percent in 2007,

resurgent inflation
- a new challenge
for business
The latest economic figures make uneasy
reading for executives in the world’s
developed economies. The US economy
seems to be teetering on the edge of
recession, as growth slipped to just 0.6
percent in the first quarter of 2008. As
the Eurozone and Japanese economies
experience the backdraft from the US
slowdown, growth forecasts are being
revised down almost everywhere (see
Figure 1). But, even if the worst happens,
seasoned executives can still count on
their experience of managing during past
downturns to see them through, correct?
Not quite. This downturn already
looks different. Paradoxically, even
as growth recedes in the developed
economies, prices are rising — a
challenge to conventional economic
thinking that a slowing economy
should quell inflationary pressures. In
the United States, headline consumer
 For Accenture internal distribution only
the fastest rate of increase in 17 years,
with energy bills alone jumping up
by 17.4 percent.1 The United Kingdom
saw inflation jump to 3 percent (at
an annual rate) in April 2008, with
further increases expected over
coming months.2 Eurozone inflation
reached 3.6 percent at an annual rate
in March 2008, its highest level since
the introduction of the euro in 1999.3
Many emerging economies are battling
even fiercer inflationary pressures (see
Figure 2). China’s inflation rate now
tops 8 percent, largely on account of
rising food prices, which increased
by 21 percent in the first quarter of
2008. India is likewise grappling with
the inflationary impact of rising food
and energy costs. This is likely to
compound the wage inflation that is
already a feature of these economies.
The simultaneous re-appearance of
these twin economic problems has
led some to speculate that the global
economy may be set for a new period
of “stagflation”, a term originally coined
to describe the combination of stagnant
growth and high inflation occasioned by
the oil supply shocks of the early 1970s.
Figure 1: Real GDP growth (annual percent change)

11.111.4
9.8 9.7
8.7 8.7
8.2
7.5

2.9 2.6 2.9 3.0 2.9

2.2 2.4
2.0
1.4 1.6 1.6 1.5 1.7 1.5 1.7
1.2
Eurozone United Kingdom United States China Japan India
Source: Global Insight 2006 2007 2008F 2009F

Figure 2: Inflation (consumer price index, annual percent change)

10% China India United States Eurozone United Kingdom
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
06

06

06

07

07
06

06

07

07

08
06

07

07
c-
b-

r-

n-

g-

t-

b-

r-

n-

g-

t-

c-

b-
Ap

Ap
Oc

Oc
De

De
Fe

Fe

Fe
Au

Au
Ju

Ju

Source: Global Insight

Drivers of gross domestic product (GDP).4

These surpluses have contributed
Emerging-market demand: it is often
argued that the growing importance of
stagflation to significant increases in domestic
liquidity. Money supply expansion has
emerging economies such as China and
India in global trade has contributed to
So why has inflation surged so often outpaced productivity growth, a lowering of inflation levels in Western
dramatically at precisely the same fuelling excess demand, capacity economies, due to the significant labor
time as the world’s major economies constraints and rising prices. China’s cost advantage enjoyed by the former in
seem to be stagnating? The answer liquidity growth, for example, remains the production of many tradable goods
lies in the key forces shaping supply high, with the M2 measure of money and services. Competition from low-
and demand in the global economy. supply expanding at around 17 percent cost producers kept prices and wages
Furthermore, these forces suggest per year.5 And any switch from saving in developed markets in check, while
that inflationary pressures are likely (a national habit) to consumption global sourcing allowed domestic prices
to persist for some time to come. will fuel further Chinese inflation. to be partially decoupled from domestic
capacity constraints in industry. Alan
Speculative demand: the commodity
Demand factors driving Greenspan, the former Chairman of the
price boom may also be partly
higher prices attributable to speculative investment
US Federal Reserve, famously dubbed this
High levels of global liquidity: period of disinflation “the China effect”.
flows — the dampening of property
notwithstanding the credit crunch that markets following the sub-prime But this is only part of the story. On
has gummed up activity in Western crisis, weak bond yields, and flagging the commodity side, the rapid growth
money markets, inflation continues stock markets have prompted of emerging economies is now fueling
to be fueled in part by a massive hedge funds and other investors to increased demand and rising prices for
overhang of liquidity in the global reallocate part of their portfolio away energy, raw materials and a range of
economy from years of relatively from property and stocks and into other commodities. China’s share of
expansionary monetary policy. Many commodities. The falling dollar has global energy consumption increased
emerging economies have enjoyed also had an impact, as it increases from 8 percent in 1990 to 16 percent by
substantial external surpluses from the purchasing power of overseas 2006.7 Under current projections, China
trade in energy, commodities and buyers of commodities that are usually and India are set to double their primary
other goods and services: the average denominated in dollar terms – a energy usage between 2005 and 2030,
current account surplus for emerging consequence of which has been a boost and by that time will account for about
economies is around 4 percent of in demand for these commodities.6 45 percent of global energy demand.8

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Figure 3: Rising prices of food and metals (Index: April 2002 = 100)
400
350
300
250
200
150
100
50
Apr-02 Apr-03 Apr-04
Note: Metals price index includes copper, aluminum, iron ore, tin, nickel, zinc, lead, and
uranium price indices. Food price index includes cereal, vegetable oils, meat, seafood,
sugar, bananas, and oranges price indices
Source: International Monetary Fund, Primary Commodity Prices
Population growth, rising incomes
and lifestyle changes in emerging
economies are also exerting an
upward influence on commodity
prices, especially of food. By some
projections the number of middle class
households in developing countries
could reach 715 million by 2020,
up 160 percent from 2004 levels.9
A growing middle class with rising
incomes is prompting changes in
lifestyle and diet, leading, for example,
to greater consumption of meat and
dairy products whose production
requires relatively large amounts of
resources such as water and energy.
Annual per capita meat consumption
in China, for example, now stands at
50kg, up from just 20kg in 1980.10
As emerging-market demand
intensifies, global commodity prices
have soared. Oil prices have reached
new record highs of around US$120
per barrel,11 while prices of metals —
such as copper, aluminum, iron ore and
lead — have more than doubled over
the past three years (see Figure 3).
Global shortages of basic foodstuffs
have caused prices of cereals, meat
and vegetable oils to rocket — the
 For Accenture internal distribution only
Metals price index
Food price index
Apr-05 Apr-06 Apr-07 Apr-08
International Monetary Fund estimates
that commodity food prices have
doubled over the last five years. Prices
for individual food commodities have
experienced even steeper rises: wheat
prices increased by 181 percent over
the three years to 2008,12 while rice
prices doubled between December
2002 and December 2007 to US$378
per tonne, and have since exceeded
US$500 per tonne.13 It is likely that
consumers have not yet borne the
full brunt of these rising commodity
prices as they take some time to work
their way into final-goods prices.
Supply factors driving
higher prices
Upward pressures on commodity
prices are coming from changes on the
supply side as well. By increasing costs
of production, these supply factors
have also dampened economic growth.
Supply disruptions: bad weather
in key food-producing regions
such as Australia, the EU, Canada,
Russia and Ukraine has affected
harvests and reduced available food
supplies, pushing prices higher.14
In response to the crisis, some
emerging-market economies have
curbed food exports, exacerbating
the impact on global prices by
restricting supply and distorting
future corrective price signals.
Higher marginal costs of production:
energy prices are rising as the costs
of finding and lifting new energy
reserves increase. Rising oil prices
have a knock-on effect on food prices,
as they increase the cost of fertilizers,
transport, and machine operations.
Fertilizer costs almost doubled in
the United States between 2000
and 2006, and the US Department
of Agriculture forecasts unit costs of
cereals productions to rise by up to
15 percent between 2007 and 2017.15
Rising first-generation biofuels
production: rising oil and gas prices
make biofuels production increasingly
commercially feasible, leading to some
substitution of land use away from
food production toward biofuel raw
materials such as wheat, soybeans,
maize and palm oil. The World Bank
estimates that almost all of the
increase in global maize production
between 2004 and 2007 was absorbed
by rising biofuel production in the
The central challenge for business in a
stagflationary environment becomes one
of how to control costs while at the same
time investing to grow revenues.
United States.16 Prompted by fears over
future energy security and climate
change, the EU and governments
around the world have set targets for
increasing use of biofuels in energy
consumption. Economic models
predict that global maize prices,
for example, will rise by 26 percent
under current plans for biofuel
production up to 2020, and could
rise by 72 percent if production plans
were doubled.17 However, second-
generation and third-generation
biofuels offer the potential of more
efficient production and a reduced
impact on commodity prices, as
they use non-food-grade biomass.
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Implications for
policymakers
A stagflationary environment
poses some unique problems for
policymakers, whose responses
can have a knock-on effect on
the business environment.
The growth versus inflation dilemma:
the policy interest rate is one of
the main instruments available to
policymakers to regulate the economy
— lowering rates to stimulate the
economy and raising rates when
the economy begins to overheat.
But in a stagflationary environment,
policymakers are unable to use
monetary policy to solve for inflation
and low growth at the same time.
Use of fiscal policy — tax cuts or
government spending — is likewise
restricted, as putting more money
in people’s pockets to kick-start
growth risks fanning the flames of
inflation. However, capital spending
by governments — for example,
on infrastructure — may be an
exception, to the extent that it raises
the long-run growth potential of an
economy. Thus, on the macroeconomic
front, policymakers generally have
to choose whether to give more
priority to fighting an economic
slowdown or to fighting inflation.
A renewed emphasis on structural
reform and opening up markets:
in a context where macroeconomic
tools are blunted, policymakers are
likely to give renewed attention to
supply-side reforms that reduce
inefficiencies and raise the productive
potential of the economy. Investment
in innovation and skills-building, for
example, can raise an economy’s
long-term growth rate while
constraining inflationary pressures
(by reducing unit costs of production).
Trade liberalization can ease supply
bottlenecks that contribute to higher
prices in food and other commodity
markets. There is also likely to be an
increased focus on competition policy
(antitrust regulation) as a means of
increasing competition and raising
productivity in industries that are
regarded as highly concentrated
or not sufficiently competitive.

Increasingly, businesses will need to
focus on all aspects of effective supply-
chain management — global sourcing and
procurement to reduce costs, agile and
efficient supply chains to reduce wastage,
accurate planning of future demand, and
innovation in product design, assembly
and manufacture to increase pricing
flexibility and margins.
Imperatives for
doing business
in stagflation
While current economic conditions are
a far cry from the deep recession and
runaway inflation that characterized
the stagflation of the 1970s, an
economic downturn coupled with
rising inflation represents new and
uncomfortable terrain for many
businesses. On one hand, businesses
face the prospect of sluggish demand
for products and services as the
economy slows down. On the other
hand, inflation of commodity and
energy prices raises production costs,
potentially eroding margins, at least
for those businesses unable to pass
on cost increases due to relatively
price-elastic demand for their
products or services. Furthermore,
some emerging economies have
sought to shield consumers from
higher prices of power, fuel and
food via imposition of retail price
controls, putting further pressure
on businesses in these economies.
 For Accenture internal distribution only
Echoing the macroeconomic
dilemma facing policymakers
(control inflation while stimulating
the economy), the central challenge
for business in a stagflationary
environment becomes one of how
to control costs while at the same
time investing to grow revenues.
Here are some key actions that
businesses can take to maintain
growth and profitability:
Harness a diversified portfolio of
consumer markets and sourcing
options
Multinational companies with
extensive market presence often
have a natural hedge against growth
and price volatility, stemming from
the fact that economic growth and
inflation rates will differ substantially
across different markets. Businesses
should ensure that they are benefiting
from fast-growing demand in
emerging markets, which have so
far been comparatively immune to
the economic slowdown, in order
to compensate for weaker growth
in mature, industrialized markets.
Similarly, global sourcing can help
companies identify lower-cost sourcing
opportunities to help offset the
margin erosion that would otherwise
result from rising input prices.
Use analytics to gauge pricing power
and areas of new demand
In a context where consumers are
feeling the pinch from sluggish or
negative real income growth, it
becomes all the more important for
businesses to be able to mine and
analyze their customer information
to understand relative pricing power
— areas where demand is relatively
price-sensitive or, conversely, where
there is more scope for premium
pricing. Analytics can also identify
opportunities for product and service
innovation and targeted promotions
to counter margin pressures.
Revisit brand strategy
Brand strategy is also important in an
environment where consumers’ real
incomes are increasingly stretched
by slower wage growth and higher
prices. One effect is that consumer
preferences often become more
clustered at each end of the price-
quality spectrum. In the UK grocery
sector, for example, Sainsbury’s has
found that its two fastest-growing
categories are the premium “Taste
the Difference” and value-for-
for example by outsourcing non-core
process operations and activities. References
money “Basics” own-brand ranges US Bureau of Labor Statistics,
Identify profitable opportunities for
1

— customers switch to the Basics Consumer Price Index: March 2008.

horizontal and backward integration
range when they want to save
Against a backdrop of slower 2
National Statistics
money on products that are not so
growth and rising costs, merger and (United Kingdom), May 13, 2008.
important to them but are still willing
acquisition strategies may come into 3
Eurostat News Release 51/2008, April 16,
to pay for premium quality for certain
play as larger players seek economies 2008. EU inflation rate for March 2008
products.18 Alternatively, consumers
of scale and scope to counter rising was 3.8 percent at an annual rate.
may be receptive to new price-quality
input costs — greater scale allows 4
Hervé Goulletquer, Crédit Agricole
configurations as they trade down from
improved purchasing power and SA and Calyon, “Emerging Markets in
more expensive products and services.
opportunities to consolidate overhead 2008: Mapping vulnerabilities to the
An example is provided by the airline
and other fixed costs across the global crisis.” Presentation to Global
industry during previous downturns.
business. Businesses may also look Insight World Economic Outlook
Many of the established airlines,
to longer-term contracts or even conference, April 16, 2008.
facing competition from new low-cost
backward integration along their 5
Nariman Behravesh, “The World
entrants, introduced premium economy
supply chains as a means to generate Economic Slowdown: How Bad, How
travel as a new service likely to appeal
efficiency savings, secure sources of Long, How Broadly-Based?” Presentation
to travelers who were increasingly
supply and provide some measure of to Global Insight World Economic
price-conscious but still looking for a
protection against price volatility. Outlook conference, April 15, 2008.
modicum of comfort while traveling.
Exploit the re-pricing in asset
6
Michael J. Dwyer, “Situation and Outlook for
Focus on efficient supply-chain Agricultural Commodity Prices.” Presentation
markets to acquire assets cheaply
management to Global Insight World Economic
In a stagflation-like period, businesses
In an era of rapidly rising commodity Outlook Conference, April 16, 2008.
need to be good at managing in an
prices, the spotlight turns to BP Statistical Review of World Energy, 2007.
environment of both high and low 7

supply-chain management as a
prices. Current economic conditions 8
International Energy Agency, Press Release
key differentiator of performance.
have resulted in significant re-pricing 07(22), http://www.iea.org/textbase/press/
Increasingly, businesses will need
of asset and commodity markets: pressdetail.asp?PRESS_REL_ID=239
to focus on all aspects of effective
stock, bond and property prices 9
Michael J. Dwyer, op. cit.
supply-chain management — global
have significantly weakened as 10
Food and Agriculture Organization of the
sourcing and procurement to reduce
speculative funds have switched to United Nations, cited in: BBC News, “The cost
costs, agile and efficient supply chains
commodities. This re-pricing offers of food: Facts and figures,” April 8, 2008,
to reduce wastage, accurate planning
significant opportunities, for example http://news.bbc.co.uk/1/hi/7284196.stm
of future demand, and innovation
for businesses to make well-timed
in product design, assembly and 11
International Strategic Analysis,
acquisitions of companies and acquire Global Update, no. 222.
manufacture to increase pricing
real assets at relatively cheap prices.
flexibility and margins. Unilever, 12
World Bank press release,
for example, has put the additional No. 2008/264/PREM, “World food
cost of commodity price inflation prices threaten poverty reduction.”
at around €400 million (US$625 13
Asia Development Bank, Asian
million, equivalent to 420 basis Development Outlook, 2008, p.28.
points of operating margin) in its 14
Michael J. Dwyer, op. cit.
first quarter of 2008, but is using a 15
US Department of Agriculture, cited
combination of strong brands, margin-
in: Overseas Development Institute,
enhancing innovation, restructuring April 2008, Briefing Paper 37.
and procurement savings to counter 16
World Bank, “Rising food prices: policy
any impact on top-line results.19
options and World Bank response.”
Harness the potential of cost- 17
International Food Policy Research
reducing technologies Institute IMPACT projections, quoted
New technologies can play a role in in: Overseas Development Institute,
controlling commodity-related cost April 2008, Briefing Paper 37.
inflation, especially of energy. By 18
Justin King, Chief Executive, J
harnessing new technologies and Sainsbury plc, interviewed on: “Today,”
renewable sources of energy, firms BBC Radio 4, May 14, 2008.
can combine initiatives to cut carbon 19
Unilever, Q1 Results Presentation,
emissions – as mandated, for example, May 8, 2008, http://www.unilever.
by regulations such as the EU Emissions com/Images/ir_Q1_2008_Results_
Trading Scheme (ETS) — with efforts Speech_tcm13-124904.pdf
to reduce energy costs and capture
growth opportunities for green
products and services. Businesses
can also seek to achieve efficiencies
in other parts of their organization,
For Accenture internal distribution only 
About Accenture
Policy & Corporate
Affairs
The Policy & Corporate Affairs group
is Accenture’s macroeconomic and
geopolitical think tank, analyzing
key trends and their implications for
business leaders and policymakers.
The group uses a combination of
primary and secondary research,
strategic analysis, scenario planning,
and ongoing dialogue and debate with
senior executives, clients and other
outside experts.
The views and opinions expressed in
this publication are meant to stimulate
thought and discussion. These ideas
should not be viewed as professional
advice.

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Henry Egan, Katharine Hirst,
Mark Purdy, Matthew Robinson,
Livia von Roetteken.
For more information visit
www.accenture.com/forwardthinking
or contact
mark.purdy@accenture.com
About Accenture
Accenture is a global management
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Combining unparalleled experience,
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