Recent readings across the globe present a perplexing picture where inflation stays stubborn. Central bankers, initially optimistic after the post-pandemic economic rebound, are now struggling to control the persistent rise in prices. The common mantra from these institutions is “higher for longer” interest rates, but the duration of this ‘longer’ period remains undefined. Source

The causes of inflation are multifaceted. In the United States, a robust economy, a strong job market, and buoyant consumer spending are hindering the cooling of inflation towards the desired 2 per cent target. India, while experiencing a decrease in core inflation, grapples with elevated food inflation, making the 4 per cent target a challenging goal. Similarly, the United Kingdom and many other nations are observing a slowdown in inflation reduction, but not at the anticipated pace.

Rate Cut Expectations Diminish

The ongoing debate surrounding inflation dominates news headlines due to central banks’ unwavering commitment to their inflation targets before considering interest rate cuts. However, the question arises: Are persistently high interest rates themselves contributing to inflationary pressures?

With each new economic data release on growth and inflation, expectations for rate cuts are being pushed further into the future. Market consensus now suggests a maximum of two rate cuts in the US this year, a significant drop from the four to five anticipated at the start of 2024. As one report notes, “The great bet on rate cuts — and it was enormous — is dead.”

The prevailing view that inflation will naturally revert to a comfortable level and that central banks will swiftly return to low interest rates seems increasingly unrealistic. The current reality is more complex, with growth persisting alongside inflation. In India, economic growth projections of 7.1 percent alongside volatile inflation might make interest rate cuts imprudent, according to Rajrishi Singhal. Many policymakers believe that current inflationary pressures are largely due to supply shocks stemming from geopolitical instability and its effects on global trade and foreign policy. Regardless of the cause, achieving the final stretch in controlling inflation is proving more difficult than initially anticipated.

Rethinking Inflation Targets?

This situation begs the question of whether a re-evaluation of inflation rate targets is necessary. Maintaining high interest rates for an extended period amidst elevated inflation can lead to low or even negative real returns for investors. Furthermore, high borrowing costs can negatively impact corporate profitability and increase the financial burden on governments.

Google Finance Team Restructure

In a parallel development highlighting a shifting business environment, Google’s Chief Financial Officer Ruth Porat announced a restructuring of the tech giant’s finance team. Source This move, which includes layoffs, is aimed at redirecting resources towards artificial intelligence (AI) initiatives. This decision underscores the increasing importance of technology-driven approaches, especially AI, in shaping the strategies of organisations, large and small.

AI Drives Finance Transformation

Chief Financial Officers (CFOs) are increasingly at the forefront of digital transformation, playing a crucial role in investments in technologies that enhance business value. Areas such as liquidity management, working capital management, compliance, cybersecurity, and fraud prevention are becoming ever more critical. Businesses relying on outdated systems risk inefficiencies and vulnerability to more agile competitors. Innovative technologies like AI offer CFOs the opportunity to improve operational efficiency, optimise resource allocation and deliver greater value to stakeholders.

As Anna Brunelle, CFO at May Mobility, stated, “As a CFO, being on top of current technology is really important structurally for so many areas of the business.” Automation, data analytics and AI are converging to enable modern CFOs to streamline processes, gain deeper insights from data and make data-driven decisions with greater speed and efficiency. Abhishek Khandelwal, CFO at LiquidX, noted that automation has “totally transformed jobs, freeing up valuable time for more strategic exercises.” He further predicts that traditional reporting methods will become obsolete as AI-powered interfaces provide real-time data access.

Cautious AI Implementation Needed

While the benefits of AI in finance are clear, it is important to remember that these tools are only as effective as their implementation. Poorly implemented AI can worsen existing inefficiencies. Jim Sparks, CFO at Kalderos, points out that the finance function has been using AI tools for some time, particularly in areas like expense management. He believes that AI should augment human capabilities by unlocking insights and improving projections, rather than replacing human roles entirely. Ultimately, AI adoption in finance, like any investment, requires careful planning and should be driven by defined business objectives, not just the allure of novelty.

Will central banks need to adjust their inflation targets to reflect the evolving economic landscape? Only time will tell, but a pragmatic approach that balances inflation control with sustainable growth seems crucial in the days ahead.

RBI building Mumbai, Financial data analysis, Digital finance technology