As we navigate the post-Covid world, the influence of inflation on economic activity can no longer be ignored. For nearly a decade before the pandemic, inflation rates lingered comfortably in the 1.5%-2.0% range, a stable, low level led to widespread complacency. This fostered an environment wherein the significance of “real,” inflation-adjusted thinking was overlooked.
However, with durational changes introduced by the global health crisis, it seems that “real” trends, those which consider inflation, need to regain prominence. The implications of this shift are potentially far-reaching, especially in the spheres of corporate finance and capital markets. It has become increasingly essential for both corporations and legal professionals to adapt their strategies to accommodate ‘real’ rather than just ‘nominal’ trends.
One key area for this transformation is expectations management. By considering ‘real’ values, companies, investors, and policy makers can gauge market trends more accurately. This will not only redefine existing strategies but will also shape new ones. Failing to consider inflation, for instance, might lead to overestimation of the nominal value of investments, whereas, a ‘real’ approach provides a more realistic picture.
The resurgence of such ‘real’ thinking is not without challenges. For one, identifying clear differentiations between real and nominal trends can be complex. It requires understanding the interplay and impact of numerous economic factors, something that may not always be possible for legal professionals not specialized in economic analysis.
Moreover, the fact that old habits die hard can pose difficulties. Companies and legal practitioners have grown accustomed to a relatively predictable and low inflation environment. The necessity to adjust their thinking can be seen as a disruption to long-established routines and norms.
Despite these challenges, adapting to this evolving environment is crucial. Focusing on real values and integrating them into decision-making will serve as a timely and necessary step in addressing the economic disruption caused by Covid. The legal community, with its influential role in corporate governance, will indeed have a pivotal role to play in this context.
As previously reported on JD Supra by Cadwalader, Wickersham & Taft LLP, the call for a comeback of ‘real’ thinking reiterates the pressing importance of understanding the fresh dynamics shaping the post-Covid corporate landscape. The era of real and nominal trends distinction is nigh, presenting uncharted territories that the world of corporate law must prepare to traverse.