A survey of 111 CFOs in July 2021 revealed that 60 percent of organizations experienced wage inflation in 2Q21, nearly double the amount compared to the previous quarter, according to Gartner, Inc. Nearly three in four CFOs polled cited the risk of lower profitability as their top concern as organizations face broad-based input price inflation increases, ranging from salaries and wages to higher costs for commodities and freight shipping.

“Most CFOs today have not experienced this level of sustained and broad-based input price inflation,” said Randeep Rathindran, vice president, research, in the Gartner Finance practice. “The risks are doing too little and taking a hit to profitability, or if inflation turns out to be transitory, overcorrecting by excessively raising prices or wages.”

Gartner polled these CFOs in a cross-industry, global survey to better understand specific types of input price inflation, how broad-based the price rises were, and CFOs’ actions and future plans to respond to input price inflation. While wages ranked at the top of input price inflation, raw materials and commodities (59 percent), freight costs (51 percent) and salaries (50 percent) rounded out the top four types of input price inflation organizations are facing (see accompanying chart).

Some of the actions executive leaders took during the early days of the pandemic have contributed to supply and service challenges that their organizations now face as demand recovers. Many organizations shortened their planning time horizons and carried the idea of just-in-time manufacturing too far to preserve cash flow. Survey data shows that 74 percent of CFOs are now concerned with the prospect of lower profitability because of margin pressures.

“The short-term cost cutting moves made by CFOs have created long-term challenges of their own,” said Rathindran. “Many CFOs are responding to early input price inflation by passing on costs to customers and failed to make long-term structural changes, such as investing in suppliers to increase capacity and improve costs. The result is they are now faced with eroding margins as they pay higher prices for materials and services as demand has surged.”

Gartner’s survey data shows that 61 percent of CFOs have responded to higher prices by passing costs on to customers. Less than a quarter of CFOs have pointed to innovation in their product lines to mitigate rising costs, while just 8 percent said they had made long-term capital investments in suppliers to improve capacity.