The pandemic is far from over, but for chief financial officers (CFOs), 2022 will be the year of inflation.

Although COVID-19 remains a concern—especially the high transmissibility of the Omicron variant—executives have had 18 months to refine remote and on-site work processes. This will help them cope with any setbacks that may arise as the pandemic enters its second year.

Meanwhile, after decades of low price increases, executives are facing the new challenge of managing high inflation.

It is not yet clear whether prices will enter the nightmare range seen in the 1980s—when mortgage rates soared to 18%. But almost every issue CFOs may deal with in 2022, from pricing goods and services, setting wages and salaries, to tax management, will be overshadowed by inflation.

Against this backdrop, here are five trends CFOs need to watch in 2022.

Inflation

In December 2020, Federal Reserve governors and regional bank presidents predicted that their preferred inflation gauge—the core personal consumption expenditures (PCE) price index—would rise 1.8% in 2021.

That was not a highlight of the Fed's forecast. The U.S. Labor Department reported last month thatcore PCE in Novemberrose 4.7% year over year.

The Fed's miss and other signs of surging inflation presented CFOs with some thorny questions at the start of 2022:

  • How much should they raise prices, and how much of theproducer price index9.6% increase in the 12 months through November should be passed on to consumers? That was the largest increase since the data series began in 2010.
  • How much should they raise wages, while considering the need to attract and retain employees? These employees face aconsumer price index(CPI) increase of 6.8% in the 12 months through November—the largest in 39 years.

How CFOs answer these questions will determine profit growth in the new year.

All eyes will be on the Federal Reserve. Fed Chair Jerome Powell, testifying before the Senate Banking Committee last month, abandoned the use of "transitory" to describe inflation and noted that price increases could persist into next summer.

The Fed accelerated the tapering of its monthly bond purchases on December 15, consistent with Powell's earlier signals, putting quantitative easing on track to end in March, three months earlier than originally planned.

The faster tightening suggests that,Moody's Analyticsbelieves, the central bank could act as early as June to slow inflation by raising its benchmark interest rate—currently at historic lows near zero.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said that in the coming months, Fed policymakers may feel more pressure from larger price increases, especially in the "core" CPI, which excludes food and energy prices. He said core CPI could rise to as much as 7% in February or March.

"Media attention often focuses on the headline numbers, but a jump of nearly two percentage points in the core data over the next few months will not go unnoticed," he said.

CFOs will be particularly aware of this price surge and would do well to prepare for it—and adjust their 2022 scenario planning—to address this possibility.

The war for talent

At the start of the pandemic, CFOs needed to focus on employee safety.

Now, amid pandemic-induced labor shortages, CFOs also need to focus on employee retention.

Attracting and retaining employees—the so-called "war for talent"—jumped from No. 8 a year ago to No. 2 in the ranking of business risks for 2022 and the next decade, according toa global surveyconducted by Protiviti and North Carolina State University of 1,453 C-suite executives and board members. (Topping the 2022 risk list was the impact of pandemic-related government policies on business).

Job seekers browsing listings can be picky. The U.S. Labor Department said in December that 7.4 million workers were unemployed in October, while job openings rose to 11 million from 10.6 million in September.

The quits rate (the percentage of total employment that left jobs) rose from 2.3% in January to3% in November, the highest since data began in 2000, the Labor Department said. The quits rate also reached 3% in September.

Many workers are changing employers to boost wages and offset the6.8% increase in CPI over the 12 months through November。

CFOs have responded to employees' newly gained bargaining power over pay and to wage increases at competitor companies. The Labor Department said private-sector hourly wages rose 4.8% year over year in November.

Looking ahead, CFOs have budgeted a 3.9% salary increase for 2022—the largest since 2008, according to a survey by The Conference Board.

Grant Thornton surveyed551 HR leaders and found that companies plan to increase salaries by an average of 5%.

"Most respondents believe the war for talent will last more than a year, and cash appears to be the primary incentive," said Tim Glowa, Grant Thornton's leader of human capital services.

Usage-based pricing

For the past decade or so, subscriptions have been the dominant pricing model for software-as-a-service (SaaS) companies, but that is changing ascompanies shift tousage-based pricing models. The reason for the shift is economic: by charging customers based on usage, companies can generate more revenue from heavy users while encouraging lighter users to continue by lowering their fees.

"There is market demand for usage-based pricing, and we expect this trend to continue accelerating in the coming months," said Kyle Poyar, operating partner at venture capital firm OpenView.

An OpenView survey showsthat about 45% of SaaS companies now use some form of usage-based pricing, up from 34% last year, a 32% increase.

Chitra Balasubramanian, CFO of tech company CircleCI, oversaw extensive modeling by her finance team to prepare the company for the shift from subscriptions to usage-based pricing. She said the results were good. The company's customers like the connection between usage and the amount they pay.

"Subscriptions in the early model were a bit like shelf software,"she said. "Whether you use it or not, you pay."

Corporate inversions

Earlier this year, there were concerns thatthe Biden administration proposedraising the corporate tax rate from 21% to 28%, partially returning to the 35% level before the 2017 tax cuts. One concern was that higher rates could spur corporate inversions—a strategy in which companies reduce their tax burden by arranging to be acquired by a partner in a lower-tax country such as Ireland.

Although talk of corporate inversions has subsided after Congress excluded corporate tax increases from the administration's "Build Back Better" bill, the risk of companies seeking foreign buyers remains, partly due to the proposed reduction in the deduction for global intangible low-taxed income (GILTI).Legislation passed by the Housewould reduce the GILTI deduction from 50% to 28.5%, raising the effective GILTI rate from the current 10.5% to 15% after accounting for the 21% corporate tax rate.

This keeps the inversion risk alive. "Any increase in the GILTI rate will affect the competitiveness of U.S.-headquartered companies, while their foreign competitors are not subject to similar taxes in their home jurisdictions,"an analysis by the Center for Forward Progresspoints out. "This is likely to have the unintended consequence of reducing U.S. employment by returning to the era of corporate inversions."

Clawbacks

The U.S. Securities and Exchange Commission (SEC) earlier this yearreinstated a 2015 policyrequiring companies that restate financial results to claw back performance-based executive compensation earned based on erroneous figures. Before reinstating the policy, the SEC only required clawbacks when restatements were due to misconduct.

The SEC's move comes as companies are getting serious about clawbacks. Of the approximately 5,500 publicly traded U.S. companies, more than 2,000 have clawback provisions in their governance documents. That is up from about 1,300 three years ago and fewer than 1,000 in 2015.

Given this environment, more clawbacks—or at least fewer major restatements—are expected in the coming years.

"For those companies on the edge, wanting to push the boundaries, this proposal may incentivize them not to issue a restatement that they might otherwise have issued," Susan Schroeder, a partner at law firm WilmerHale,told The Wall Street Journal。

Or they may issue a restatement but are more likely to fall below the threshold that triggers SEC review. Either way, the new environment will make CFOs think more about restatements and clawbacks than they did a year ago.