Inflation Outlook: 4 Scenarios to Address in Your Forecasts

It would be nice to think that there’s something like a weather forecast for the future of our inflationary economy – a set of predictions that you can reasonably rely on to be more or less accurate. Of course, there is no such thing, but a recent article in Wall Street Journal’s Risk and Compliance Journal offers the next best thing. In The Inflation Outlook: Preparing for the Unpredictable, Deloitte Consulting analysts lay out four scenarios for how inflation might play out in the next three years, all with appropriately meteorological names: Blue Skies, Sun Showers, Stormy Weather and Downdraft.

The scenarios are not positioned as predictions. Instead, they “cover much of what economists and policymakers are discussing and executives may need to confront.” This approach is intended to help leaders prepare their organizations to be resilient, no matter what the future of inflation brings. I appreciated that Deloitte took the time to identify responses tax leaders might consider executing in each scenario (which I summarize below). 

Here are the four scenarios: 

1. Blue Skies. Inflation settles back to historical norms (around 2%), supply chain disruptions ease, and the Fed responds with limited and gradual interest rate increases. In a benign pricing and financing environment, tax departments can exploit the opportunity to invest in and improve tax compliance functions, including data management, processes, and technology.
2. Sun Showers. Growth persists, but it is uneven across industries. Inflation runs between 3% and 4%, and the labor market remains somewhat constrained. Tax departments should consider the tax impacts of cost-saving strategies such as pre-buying raw materials and leveraging forward contracts.
3. Stormy Weather. With inflation running at around 8% to 9%, a wage/price spiral takes off. The Fed raises interest rates sharply, triggering a recession in 2023. Tax leaders should look for opportunities for new efficiencies in the sourcing of imports and the associated customs/global trade taxes.
4. Downdraft. In this scenario, inflation collapses to between 0% and 1% due to a faster-than-expected resolution of supply chain issues and reduced consumer demand. Corporate profits decline, unemployment increases, and the Fed moves interest rates to historic lows. For tax, the recommendation is to focus on increasing efficiency and lowering risk through economies of scale and cost-saving strategies, such as automation.

These scenarios may be a long way from an actual forecast, but they’re useful indicators for business and tax leaders who want to make the unpredictable a little more manageable.