By Ivo Mertens, Chief Economist, iBanFirst
Market indicators show that the UK is likely to suffer the highest inflation out of all G7 nations, marking a turbulent time for small and medium multinational (SMMs) businesses who must protect their margins against volatility. But this isn’t a one-off or a UK-only issue.
Almost all major markets are weathering an economic storm and for those that source or sell across borders, this can pose an operational challenge. Commodity markets have provided some respite against this backdrop – as they have remained relatively stable. But there is growing nervousness that further disruption is just around the corner, and this is being driven by changes in producer inflation.
Producer inflation often precedes rising business and consumer costs, and can present signs that markets are heading towards a recession. For finance leaders, in charge of international payments, protecting margins and safeguarding the business against market shock, this can place the spotlight on their ability to adapt.
More than ever, they need to be able to anticipate the months ahead, and make strategic decisions to keep operations running efficiently and to mitigate the effects of downward economic pressure. They must be informed and pay close attention to exchange rate and producer inflation trends to execute their role effectively.
Unusual, emerging producer inflation trends
Right now, an unprecedented trend is emerging within producer inflation that many finance leaders might have missed. There is a fundamental misalignment between production zones, and inflation patterns, across the globe. Typically, in periods of strong global inflation, it is developed economies, like the U.S. or UK, that experience moderate changes. This is because they are often better shielded from supply chain shocks and geopolitical fallout.
Conversely, emerging markets, like the BRIC nations, tend to see much sharper increases in costs and the value of goods. But what is being witnessed today is rewriting this rulebook. Taking into consideration the latest Producer Price Index (PPI) figures, which are often seen as the most helpful aggregation and useful picture of business inflation, it appears the trend has reversed. In fact, U.S producer inflation stands around 2.6% year-on-year with the UK at 1.9%. At the same time, India and China are in deflationary territory at 0.52% and -2.9% respectively.
The speed at which competitiveness can change
Now, there are a number of reasons behind these trends. They can range from the side effects of Trump’s tariffs, the interconnectedness of developed economies with the rest of the world, and the proximity of certain jurisdictions to raw materials and other goods. But, ultimately, the causes matter less than the consequences themselves.
What this trend shows is that China, and other fast-developing economies, have a renewed position as an attractive global hub for business. They have reinstated themselves as undisputed production hubs, despite a wider push from markets to on-shore or near-shore their production lines, as well as geopolitical pressures like Trump’s tariff war.
It also highlights the speed at which markets can gain or lose competitiveness. And this, in particular, is the lesson that finance leaders need to heed. When running an SMM, market dynamics can change quickly and they must be prepared to pivot strategy or protect their operations. With these producer inflation trends in mind, they must regularly reassess supply chains and identify fallback production zones. This not only guarantees the lowest prices, but it helps mitigate customs issues and geopolitical risks.
Likewise, finance leaders must pay closer attention to foreign exchange and how this can help address the fallout of heightened producer inflation and market volatility. Analysis covering over €10 billion in payments during H1 2025 shows there’s been a nearly 5-point drop in dollar payments, while local currency payments now account for 20%.
This shows that there’s a growing recognition that a reliance on the dollar is not always the right step for businesses. Instead, hedging strategies, rate lock-ins, and holding multi-currency accounts can protect margins and actually generate revenue for business. When producer inflation is high, finance leaders should seek to evaluate their currency positions to build the most resilient payment strategies.
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In an operating environment that is increasingly susceptible to change and volatility, SMMs look towards their finance leaders to exercise control. With persistent producer inflation, and unusual market dynamics in developed economies, it’s no longer an option to maintain the status quo. Instead, leaders need to safeguard their margins, and profitability, by understanding how these trends impact their business, and when to amend their supply chains, and seek to embed alternative currencies into their global payments strategies.
