Inflation has had a significant impact on the European and US economies, on various aspects, including the UK economy and consumer sentiment. Factors such as war, rising energy prices, labor market dynamics, and age demographics have contributed to this situation.

Watch Oliver Wyman experts Kai Bender, Rupal Kantaria, and Ana Kreacic discuss the effects of inflation and how they are felt differently across income brackets and sectors, leading to adjustments in pricing, investment behavior, and consolidation opportunities.

This interview was filmed in February 2023

Kai Bender
Hi, and welcome, everybody. We're here to talk a little bit about inflation. 2022 was an exceptional year. We've seen the start of the horrific war in Ukraine. We've seen increase in energy prices in general, in cost of living, we've seen inflation rise and the time of low interest has come to a close. I'm here together with Rupal and Ana, to discuss the matter. By means of introduction, Rupal is a partner in our London office and leads our OW Forum work there. Ana is co-heading our Forum work and is excelling in our consumer sentiment work in particular. So welcome both to the discussion

Kai Bender
Rupal, to start with you. How is the situation impacting the UK?

Rupal Kantaria
I think if we look at inflation in the UK, it's been in the double digits after 30 years of pretty low and stable inflation like it has been the case in the Eurozone, in the US, and in other parts of the world, and some similar factors: war, rising energy prices, grain, quantitative easing - particularly an issue in the US - but also some quite specific factors in the UK which has resulted in more persistent inflation. Firstly, a tight labor market, something that those of us in the UK economy is really feeling the pain on, driven by a variety of factors, so Brexit, more long-term sickness numbers in the UK labor stats, and also older workers leaving the workforce. We've also seen a weak pound in the UK, resulting in a lot of import-led inflation, in particular around food prices and also the energy cap that the Government put into place has resulted in that persistency creating a bit of a time lag with some of the feed through of inflation to consumer prices.

Kai Bender
That's interesting. Thank you very much for that perspective. Ana, what is the impact on consumer sentiment?

Ana Kreacic
I think on the consumer side, the impact depends on which consumer and where. A lot of what Rupal said about the UK also resonates in the US. The US economy is doing a lot better than many people expected at that time: household spending is up, half a million new jobs were just released, and the Fed is having a pretty hard job in trying to get inflation down. We're not anymore in the 8%, we're a little bit lower than that, but we're nowhere near the 2% target that they're trying to get it down to.
And I think that's going to continue being hard. But it really depends on which consumer we're talking about, because when you look at consumers that are in the lower half of the income distribution, many of them have gone through already the pandemic related savings, and they're having a very hard time with the higher inflation, the higher price increases, what does it mean in terms of their debt, their ability to pay off or delay? When you look at the mid to the higher end income, they're still spending, and they're driving the spending that's continuing, and that's making the Fed's job even harder. So, it's kind of a tale of two cities, right? It depends a little bit on which consumer.
The question is what will happen later, when the mid plus income bracket also runs out of the pandemic-related savings, and where we go from there. But the tight labor market at least is providing on the one hand a cushion to consumers. On the other hand, we’re in a new world that we haven’t been in yet.

Kai Bender
What does that do to sectors like real estate and mortgage, for example?

Ana Kreacic
I think it's similar. We're seeing some delays. We're seeing some softening in the real estate sector. We're seeing a trickle of issues coming around whether it's credit card debt or mortgages. And again, it's very similar to where are you on that income distribution spectrum. I don't know how you're seeing it in the UK.

Rupal Kantaria
The only thing I'd add to that building on what Ana said is I think there's really an age component as well. And in the UK, we're seeing a lot of older, wealthier workers who are living mortgage free, who are exiting the workforce and have a lot of disposable income where inflation really isn't a factor. And that's obviously very different when you are trying to get onto the housing ladder and that's becoming much more challenging.

Kai Bender
In continental Europe, one could say that the ECB was a little bit late to the party in terms of increasing interest rates. Now that it is happening, one can expect that it's going to continue all the way through 2023, at least until the midyear point. As you said, Ana, inflation is slowly coming down. I personally do not expect it to come down to the levels of 2 to 3%, where we need to have it.

Kai Bender
It's probably something around 5 to 6%. So, from a perspective of a consultancy, the question I ask myself is what does that do to our clients? What does it do to the industrial sector in terms of investment behavior that we can expect? What is your perspective on that?

Rupal Kantaria
I think that clients are really starting to see how pervasive the impact of inflation is across all aspects of their business. So clearly there's a pricing element of how do we change prices? Do we pass it all the way through to the customer? If yes, which customers, how do we improve customer stickiness? So, I think there's elements there, how do we digitize and take cost out of the business for insurance, which is a sector I work in. We're looking at the impact of things like claims. So how do we settle quickly because actually prices are rising and where do we settle quickly as opposed to sometimes waiting to see how an incident might play out? So, I think many clients are really looking across their business, first of all, to really see how this new inflationary environment is impacting us across our business and not only with clients but also with employees.
And in the UK, we saw a number of employers move quite quickly to give one-off cost of living payments to members of their employee population and also provide financial advice.

Ana Kreacic
We saw something similar in the US in terms of companies moving quickly from the employee side. What I think it's been interesting is also seeing how it is prioritizing and how is it pushing the prioritization of investments. So, you know, you look at - we were talking about mobility a little bit earlier - you look at the adoption rate of EVs: last year was a huge year in the US. When we talked to consumers and when we talked to people in the market, a lot of the push was the price of gas. So, at some point, the price of gas got to the point where the newness for many people of EVs was worth the try.

Kai Bender
Are there subsidies for EVs in the States?

Ana Kreacic
There are subsidies for EVs in the States as well. And there's a broader conversation around the charging network and how do we streamline that and how we invest in that as well. So that's driving a part of it. But on the other hand, you look at things like retail or groceries specifically, and you're starting to see pushback. Walmart just announced that it was pushing back on some price increases by their suppliers because they felt that time had run out and the prices of some goods are not staying as high as perhaps, they were six months ago.
And there was time that there should be some adjustment both up and down when the time is right. So, you're starting to see pushback in that direction as well, obviously, by players that tend to have the leverage, but it is affecting all sorts of sectors.

Kai Bender
We talked a little bit about the consumer perspective. We talked a little bit about the corporate’s perspective, now perhaps let's come to private capital for a second. There’s a lot of dry powder, as we call it, out there, still. On the other hand, the tick upwards in interest rate has led to a significant decline in deal activity throughout 2022. What is your expectation going forward? Is the market going to come back?

Rupal Kantaria
I think there's always opportunities with every challenge and I think the private equity industry is finding those opportunities. We were talking earlier about the insurance sector and saying actually we see a widening gap between the best and the worst players, which again brings a real opportunity for consolidation in the broker space, in the life space.
So, I think there will be a drop-in activity as we face a tic in the UK into a more recessionary low growth environment. But I think it will just shift in shape and size.

Ana Kreacic
For me it's a timing matter and I think there's a drop in activity. But the question is the timing of realigning; what the expected prices sellers are trying to get, with the purchase prices that perhaps buyers are more comfortable with. And I think we're still in the end phase of, what do sellers remember they were hoping to get last year and what they’re hoping to get this year.
And I think we have a little bit of a time left before the new norm of what those prices should be settles in. And I think once that new norm settles in, you're just going to see a realignment of the supply and demand market.

Kai Bender
Yeah. Now as consultants, we're in the business of extracting and productizing learnings from what we see, right? That's the essence of what we do. So, looking back to 2022, what kind of learnings would you say we should extract? What's the number one takeaway for the economy at large or for our clients or for our people?

Rupal Kantaria
I think that's a good habit not just for consultants but for human beings to look back at past experience and extract learnings. For me personally there’s three things that stand out to me, one is the danger of inflation. So, I really only read about the dangers of inflation in my economics textbooks, I haven't experienced that in my lifetime, my working lifetime.
So, I think really seeing the impact across society has reminded us all that once inflation is in the system, it's actually quite difficult to get out. The second thing, again, I've been raised in an era of peace, at least in the West. So, I think we didn't forget about the costs of war, but I think we underestimated the costs of war and the impact on the economy.
And then the final thing I really learned from 2022 is prior to that, my mind had been very much focused on energy sustainability. And I think we've really seen that balanced with energy security and also energy affordability and that those three legs need to be really front of mind as we drive forward on the energy transition.

Kai Bender
Excellent points. I would personally amend that there was probably even not just the cost of war that we kept forgetting about, but there's even a dividend of peace in the way we have been doing business in continental Europe. And this dividend basically has been evaporated right now, right? It's a totally new normal.
But over to you Ana, what is your key learning?

Ana Kreacic
Two things come to mind. One is I think we counted on stability, and we had a very short-term memory approach to things because I do remember inflation from when I was younger. It's actually one of the reasons why I went to study economics. My little pivot piggybank that could have bought a stereo one day bought me just an ice cream. I’m dating myself and geo-locating myself to a different country.
But I think we've become a little bit short-termist in our history. And, you know, we're forgetting that once you get to disruption, whether it's the COVID pandemic and you look at airports around the world and think about them shutting down versus reopening up, it's very difficult to go back to where you were. And whether it’s disruption due to war or disruption due to the pandemic or any sort of disruption, it is much harder to build that back up.
And keeping that stability is something that we counted on, and I think it's something that we have to invest a lot more in, to be able to have the free exchange of ideas, goods and services is as we want it.
On the inflation side, I think we’re in a new world because I think in many countries, we’re going to have very tight labor markets. We have some structural challenges with those labor markets and there's a lot of worry about stagflation. And so, I'm hoping that many, many folks across the public and private sector are going to collaborate to land us just in the right spot because we're in a pretty tricky situation these days.

Kai Bender
Thank you very much. To close out on a on a positive note, are there any opportunities you see for us going forward?

Rupal Kantaria
I think the energy transition is something I'm really passionate about and there's massive opportunity. You know, I think actually those three things I talked about - security, affordability, and sustainability - really come together in driving us forward towards renewables. There's huge investment needed, not just from a financial perspective, but actually investment in ourselves and learning and developing new technologies. And that's really exciting.

Ana Kreacic
For me it's also a time of just investing and focusing on transitions and positive sustainable transitions and many industries that have been trying to make those transitions for a long time. But perhaps the time wasn't right, or the risks weren't worth it. And I think when there is disruption, sometimes you have to dive in to get ahead when the disruption stops. So, I’m hoping lots of companies are going to dive in towards the positive.

Kai Bender
Thank you very much for this exciting conversation, Rupal, Ana. It was great and I look forward to continuing the journey with you and with all of you. Thank you very much.

Rupal Kantaria and Ana Kreacic
Thanks Kai.
 

Inflation has had a significant impact on the European and US economies, on various aspects, including the UK economy and consumer sentiment. Factors such as war, rising energy prices, labor market dynamics, and age demographics have contributed to this situation.

Watch Oliver Wyman experts Kai Bender, Rupal Kantaria, and Ana Kreacic discuss the effects of inflation and how they are felt differently across income brackets and sectors, leading to adjustments in pricing, investment behavior, and consolidation opportunities.

This interview was filmed in February 2023

Kai Bender
Hi, and welcome, everybody. We're here to talk a little bit about inflation. 2022 was an exceptional year. We've seen the start of the horrific war in Ukraine. We've seen increase in energy prices in general, in cost of living, we've seen inflation rise and the time of low interest has come to a close. I'm here together with Rupal and Ana, to discuss the matter. By means of introduction, Rupal is a partner in our London office and leads our OW Forum work there. Ana is co-heading our Forum work and is excelling in our consumer sentiment work in particular. So welcome both to the discussion

Kai Bender
Rupal, to start with you. How is the situation impacting the UK?

Rupal Kantaria
I think if we look at inflation in the UK, it's been in the double digits after 30 years of pretty low and stable inflation like it has been the case in the Eurozone, in the US, and in other parts of the world, and some similar factors: war, rising energy prices, grain, quantitative easing - particularly an issue in the US - but also some quite specific factors in the UK which has resulted in more persistent inflation. Firstly, a tight labor market, something that those of us in the UK economy is really feeling the pain on, driven by a variety of factors, so Brexit, more long-term sickness numbers in the UK labor stats, and also older workers leaving the workforce. We've also seen a weak pound in the UK, resulting in a lot of import-led inflation, in particular around food prices and also the energy cap that the Government put into place has resulted in that persistency creating a bit of a time lag with some of the feed through of inflation to consumer prices.

Kai Bender
That's interesting. Thank you very much for that perspective. Ana, what is the impact on consumer sentiment?

Ana Kreacic
I think on the consumer side, the impact depends on which consumer and where. A lot of what Rupal said about the UK also resonates in the US. The US economy is doing a lot better than many people expected at that time: household spending is up, half a million new jobs were just released, and the Fed is having a pretty hard job in trying to get inflation down. We're not anymore in the 8%, we're a little bit lower than that, but we're nowhere near the 2% target that they're trying to get it down to.
And I think that's going to continue being hard. But it really depends on which consumer we're talking about, because when you look at consumers that are in the lower half of the income distribution, many of them have gone through already the pandemic related savings, and they're having a very hard time with the higher inflation, the higher price increases, what does it mean in terms of their debt, their ability to pay off or delay? When you look at the mid to the higher end income, they're still spending, and they're driving the spending that's continuing, and that's making the Fed's job even harder. So, it's kind of a tale of two cities, right? It depends a little bit on which consumer.
The question is what will happen later, when the mid plus income bracket also runs out of the pandemic-related savings, and where we go from there. But the tight labor market at least is providing on the one hand a cushion to consumers. On the other hand, we’re in a new world that we haven’t been in yet.

Kai Bender
What does that do to sectors like real estate and mortgage, for example?

Ana Kreacic
I think it's similar. We're seeing some delays. We're seeing some softening in the real estate sector. We're seeing a trickle of issues coming around whether it's credit card debt or mortgages. And again, it's very similar to where are you on that income distribution spectrum. I don't know how you're seeing it in the UK.

Rupal Kantaria
The only thing I'd add to that building on what Ana said is I think there's really an age component as well. And in the UK, we're seeing a lot of older, wealthier workers who are living mortgage free, who are exiting the workforce and have a lot of disposable income where inflation really isn't a factor. And that's obviously very different when you are trying to get onto the housing ladder and that's becoming much more challenging.

Kai Bender
In continental Europe, one could say that the ECB was a little bit late to the party in terms of increasing interest rates. Now that it is happening, one can expect that it's going to continue all the way through 2023, at least until the midyear point. As you said, Ana, inflation is slowly coming down. I personally do not expect it to come down to the levels of 2 to 3%, where we need to have it.

Kai Bender
It's probably something around 5 to 6%. So, from a perspective of a consultancy, the question I ask myself is what does that do to our clients? What does it do to the industrial sector in terms of investment behavior that we can expect? What is your perspective on that?

Rupal Kantaria
I think that clients are really starting to see how pervasive the impact of inflation is across all aspects of their business. So clearly there's a pricing element of how do we change prices? Do we pass it all the way through to the customer? If yes, which customers, how do we improve customer stickiness? So, I think there's elements there, how do we digitize and take cost out of the business for insurance, which is a sector I work in. We're looking at the impact of things like claims. So how do we settle quickly because actually prices are rising and where do we settle quickly as opposed to sometimes waiting to see how an incident might play out? So, I think many clients are really looking across their business, first of all, to really see how this new inflationary environment is impacting us across our business and not only with clients but also with employees.
And in the UK, we saw a number of employers move quite quickly to give one-off cost of living payments to members of their employee population and also provide financial advice.

Ana Kreacic
We saw something similar in the US in terms of companies moving quickly from the employee side. What I think it's been interesting is also seeing how it is prioritizing and how is it pushing the prioritization of investments. So, you know, you look at - we were talking about mobility a little bit earlier - you look at the adoption rate of EVs: last year was a huge year in the US. When we talked to consumers and when we talked to people in the market, a lot of the push was the price of gas. So, at some point, the price of gas got to the point where the newness for many people of EVs was worth the try.

Kai Bender
Are there subsidies for EVs in the States?

Ana Kreacic
There are subsidies for EVs in the States as well. And there's a broader conversation around the charging network and how do we streamline that and how we invest in that as well. So that's driving a part of it. But on the other hand, you look at things like retail or groceries specifically, and you're starting to see pushback. Walmart just announced that it was pushing back on some price increases by their suppliers because they felt that time had run out and the prices of some goods are not staying as high as perhaps, they were six months ago.
And there was time that there should be some adjustment both up and down when the time is right. So, you're starting to see pushback in that direction as well, obviously, by players that tend to have the leverage, but it is affecting all sorts of sectors.

Kai Bender
We talked a little bit about the consumer perspective. We talked a little bit about the corporate’s perspective, now perhaps let's come to private capital for a second. There’s a lot of dry powder, as we call it, out there, still. On the other hand, the tick upwards in interest rate has led to a significant decline in deal activity throughout 2022. What is your expectation going forward? Is the market going to come back?

Rupal Kantaria
I think there's always opportunities with every challenge and I think the private equity industry is finding those opportunities. We were talking earlier about the insurance sector and saying actually we see a widening gap between the best and the worst players, which again brings a real opportunity for consolidation in the broker space, in the life space.
So, I think there will be a drop-in activity as we face a tic in the UK into a more recessionary low growth environment. But I think it will just shift in shape and size.

Ana Kreacic
For me it's a timing matter and I think there's a drop in activity. But the question is the timing of realigning; what the expected prices sellers are trying to get, with the purchase prices that perhaps buyers are more comfortable with. And I think we're still in the end phase of, what do sellers remember they were hoping to get last year and what they’re hoping to get this year.
And I think we have a little bit of a time left before the new norm of what those prices should be settles in. And I think once that new norm settles in, you're just going to see a realignment of the supply and demand market.

Kai Bender
Yeah. Now as consultants, we're in the business of extracting and productizing learnings from what we see, right? That's the essence of what we do. So, looking back to 2022, what kind of learnings would you say we should extract? What's the number one takeaway for the economy at large or for our clients or for our people?

Rupal Kantaria
I think that's a good habit not just for consultants but for human beings to look back at past experience and extract learnings. For me personally there’s three things that stand out to me, one is the danger of inflation. So, I really only read about the dangers of inflation in my economics textbooks, I haven't experienced that in my lifetime, my working lifetime.
So, I think really seeing the impact across society has reminded us all that once inflation is in the system, it's actually quite difficult to get out. The second thing, again, I've been raised in an era of peace, at least in the West. So, I think we didn't forget about the costs of war, but I think we underestimated the costs of war and the impact on the economy.
And then the final thing I really learned from 2022 is prior to that, my mind had been very much focused on energy sustainability. And I think we've really seen that balanced with energy security and also energy affordability and that those three legs need to be really front of mind as we drive forward on the energy transition.

Kai Bender
Excellent points. I would personally amend that there was probably even not just the cost of war that we kept forgetting about, but there's even a dividend of peace in the way we have been doing business in continental Europe. And this dividend basically has been evaporated right now, right? It's a totally new normal.
But over to you Ana, what is your key learning?

Ana Kreacic
Two things come to mind. One is I think we counted on stability, and we had a very short-term memory approach to things because I do remember inflation from when I was younger. It's actually one of the reasons why I went to study economics. My little pivot piggybank that could have bought a stereo one day bought me just an ice cream. I’m dating myself and geo-locating myself to a different country.
But I think we've become a little bit short-termist in our history. And, you know, we're forgetting that once you get to disruption, whether it's the COVID pandemic and you look at airports around the world and think about them shutting down versus reopening up, it's very difficult to go back to where you were. And whether it’s disruption due to war or disruption due to the pandemic or any sort of disruption, it is much harder to build that back up.
And keeping that stability is something that we counted on, and I think it's something that we have to invest a lot more in, to be able to have the free exchange of ideas, goods and services is as we want it.
On the inflation side, I think we’re in a new world because I think in many countries, we’re going to have very tight labor markets. We have some structural challenges with those labor markets and there's a lot of worry about stagflation. And so, I'm hoping that many, many folks across the public and private sector are going to collaborate to land us just in the right spot because we're in a pretty tricky situation these days.

Kai Bender
Thank you very much. To close out on a on a positive note, are there any opportunities you see for us going forward?

Rupal Kantaria
I think the energy transition is something I'm really passionate about and there's massive opportunity. You know, I think actually those three things I talked about - security, affordability, and sustainability - really come together in driving us forward towards renewables. There's huge investment needed, not just from a financial perspective, but actually investment in ourselves and learning and developing new technologies. And that's really exciting.

Ana Kreacic
For me it's also a time of just investing and focusing on transitions and positive sustainable transitions and many industries that have been trying to make those transitions for a long time. But perhaps the time wasn't right, or the risks weren't worth it. And I think when there is disruption, sometimes you have to dive in to get ahead when the disruption stops. So, I’m hoping lots of companies are going to dive in towards the positive.

Kai Bender
Thank you very much for this exciting conversation, Rupal, Ana. It was great and I look forward to continuing the journey with you and with all of you. Thank you very much.

Rupal Kantaria and Ana Kreacic
Thanks Kai.