Managing Inflation Risks: A Practical Guide
Article by Cristian deRitis
Price hikes and price uncertainty can have a huge impact on spending, investment, loan origination and, ultimately, default risk. But what tools can lenders use to assess inflation risk in real time, and how can credit risk models be revised to account for inflation-driven changes in consumer behavior and to protect against financial instability?
Inflation is a critical challenge that demands the attention of risk managers. It is a focal point for central bankers, businesses and households, and the impact inflation can have on businesses and lenders requires a vigilant and proactive approach to safeguard financial stability and foster sustainable growth.
As we witnessed in the aftermath of the pandemic, the relentless climb of prices doesn't merely create uncertainty; it stirs a profound anxiety across the economic landscape, compelling consumers and investors alike to hold back on spending and investment – actions that are vital for economic growth. For credit providers, this isn't a matter of casual observation but a pressing issue that directly affects the performance of their outstanding loans and future origination volumes.
What factors must lenders and their risk managers consider in their efforts to mitigate inflation risk, and what adjustments do they have to make to credit risk models? We’ll talk about all this in a minute, but the first step in this process is figuring out the best inflation assessment tool.
