Interest rates, inflation, and supply chains: A perfect storm for businesses?

Business leaders rarely get the luxury of focusing on just one macro variable at a time. In the wake of the pandemic, however, three forces interest rates, inflation, and supply-chain volatility have collided and created a strategic crucible. What makes 2025 different is that each element directly amplifies the other two. Higher policy rates raise financing expenses for inventory, persistent inflation complicates pricing decisions, and still-fragile logistics networks mean executives cannot simply “buy ahead” or “run lean” with total confidence. Understanding the interplay is now table stakes for protecting margins and cash flow.

The interest-rate reality check

Since early 2022, central banks from Washington to Wellington have switched from stimulus to restraint, reflecting a broader trend in global interest rates. By August 2025, the U.S. Federal Reserve’s target range sits at 4.25%-4.50%, with the upper bound at 4.50% the highest level in eighteen years. This matters because most corporate revolvers, equipment lines, and asset-based loans float off short-term benchmarks.

Short-term effects are straightforward: companies with variable-rate debt feel an immediate squeeze on interest expense, while asset valuations that depend on discounted cash flows face downward pressure. Longer term, lenders become choosier. Banks are trimming commitment sizes, tightening covenants, and requiring more collateral, all of which can slow expansion plans, especially in inventory-heavy sectors like consumer electronics, building materials, and retail.

The silver lining is that surplus cash finally earns a real return. Treasury bills and high-grade commercial paper above 4% present a genuine income opportunity for cash-rich firms. Treasury teams that actively ladder maturities can partially offset higher borrowing costs.

Inflation: Still in the room

Headline inflation has moderated from the 2023 spike, yet core readings remain above pre-pandemic norms in most G20 economies. Service wages are particularly sticky. Many logistics and manufacturing contracts now include cost-escalation clauses, meaning that procurement budgets update quarterly rather than annually.

The executives are between a rock and a hard place: they raise the prices too high and may lose the volume; they maintain the price and may lose the margins. More companies are also testing tiered service packages, subscription options, or value pricing as a way to push through costs without inducing sticker shock. The success of these tactics depends on granular cost visibility, not just on the raw materials but on the freight, packaging, and energy as well.

Supply chains: Stabilising, Yet sensitive

Global shipping data show that bottlenecks are easing, but not disappearing. After a chaotic 2021-2022, ocean carriers added capacity while demand growth cooled. A widely followed container cost benchmark, the Freightos Baltic Index, fell by 19.7% on a week-over-week basis, to about $2,894 per forty-foot equivalent unit (FEU) in the week ending July 3, 2025, as a result of diminished demand and carrier capacity. That drop is welcome, yet it masks regional flare-ups: labour disputes at U.S. West Coast ports, seasonal typhoons in East Asia, and Red Sea security scares can still produce week-long rate spikes.

Meanwhile, inventory positions are out of sync. Many companies bought heavily in 2023-2024 to outsmart shortages and now hold surplus stock. The temptation is to run down inventories just as freight costs hit a trough. But should demand rebound or a port strike erupt, stock-outs can return with a vengeance. The smarter play is dynamic safety-stock modelling based on lead-time reliability rather than price alone.

The three-way feedback loop

The real risk in 2025 is not any single variable; it is their interaction. Take a mid-size footwear producer that sources uppers in Vietnam, assembles in Mexico, and sells in the United States. Each pair represents capital tied up for 60-90 days before revenue hits the ledger. If interest rates climb, the carrying cost of that in-transit inventory rises. If inflation pushes leather and labour costs higher, the dollar value of each shoe and, therefore, the capital at risk increases as well. One serious customs delay or container rollover can turn a profitable order cycle into a loss.

Put simply, interest rates determine how expensive it is to hold buffer stock, inflation defines the replacement cost of that stock, and supply-chain reliability controls how much buffer you need. Misread any leg of the triangle, and the other two will magnify the pain.

Action playbook for 2025–2026

Executives cannot control macro forces, but they can build resilience. Start with a clear framework, then tailor the levers to your balance-sheet realities and risk appetite.

Strengthen cash-flow forecasting

Replace annual plans with rolling 13-week projections that integrate rate assumptions, input-cost scenarios, and shipment schedules. A living forecast makes it easier to quantify the impact of a 50-basis-point rate hike or a 10% freight surge.

Diversify funding sources

Look beyond traditional bank lines. Supply-chain-finance platforms can let suppliers monetise receivables at attractive rates while you extend payment terms. Investment-grade issuers may tap the short-duration bond market; smaller firms can explore private-credit funds, often more flexible than banks in covenant design.

Hedge with precision

Swaps or forward-rate agreements can lock borrowing costs, and commodity futures can cap raw-material exposure. But hedge selectively: every contract carries a premium. Reserve hedges for inputs with double-digit volatility or for periods when market forwards align with your internal cost thresholds.

Build modular supply chains

Dual-source critical items where alternate vendors already exist; otherwise, create regional inventory hubs that shorten lead times. Don’t duplicate the entire network blindly. Instead, invest in the ability to shift 20-30% of volume on short notice, protecting against localised disruptions without inflating overhead.

Re-think pricing and value communication

Pair any price increase with a tangible benefit enhanced customer service, sustainability credentials, or bundled maintenance. Customers tolerate higher costs when value is clear and communication is transparent.

Each lever works best in concert. For example, an apparel brand that finances inventory through a supply-chain-finance program can afford to hedge cotton prices further out, reducing cost volatility and giving marketing more runway to justify selective price hikes.

Pitfalls to dodge

Executives often stumble not because they lack information but because they focus on the wrong horizon. Three common missteps stand out.

• Over-optimism on rate cuts. History shows that once inflation expectations become unanchored, central banks wait for sustained evidence before easing. Budget assuming current levels persist through at least mid-2026.
• Treating freight savings as permanent. Carrier alliances have idled capacity before to prop up rates; assuming $2,800 FEU costs forever can embed nasty surprises when rates rebound.
• Ignoring wage inflation lag. Labour contracts in logistics and manufacturing often renegotiate on multi-year cycles. Even if raw-material inflation cools, payroll costs may step up sharply in 2026.

Remember, these mistakes cascade: underestimate freight recovery and you may under-order inventory, forcing costly airfreight later; misjudge wage inflation and your head-count budgets get squeezed just when financing is tightest.

Looking beyond the storm

Baseline forecasts from multilaterals suggest a gentle easing: global real GDP around 2.8% in 2026, inflation settling near 2%–3% in advanced economies, and interest rates drifting lower but holding above pre-pandemic averages. Yet the distribution of outcomes is wide. Energy-price shocks, geopolitical flashpoints, or an abnormally strong growth spurt in India or Africa could jolt demand and prices. Scenario planning is no longer a checkbox exercise; it is an operational necessity reviewed quarterly.

Positive surprise, faster disinflation, and faster-than-anticipated rate reductions would give rise to a capex boom, which would put additional pressure on limited logistics capacity. On the other hand, a new supply shock would trigger another wave of inflation, compel further tightening, and put weaker balance sheets under pressure. The lesson: optionality is better than prediction. The ability to structure contracts, financing, and production footprints to be flexible is worth more than any one forecast.

Key takeaways

Competitive advantage is now determined by the intersection between interest rates, inflation and supply-chain factors. See liquidity as strategic fuel, and incorporate economic indicators into live dashboards, and build networks that bend instead of break. Those companies that incorporate optionality in financing, sourcing, and pricing will not only survive the perfect storm, but will sail through competitors who remain waiting on calm seas.

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.