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Business owners can handle inflation by watching these 7 little-known metrics

By August 31, 2021No Comments

(This article originally appeared in the Philadelphia Inquirer)

If you’re a consumer facing rising prices, you can always decide to either pay a little more or not buy at all. But it’s not so easy for someone running a business. When faced with rising prices on core expenditures, business owners can’t just stop purchasing. Instead, they need to adapt. And to do this, they need some questions answered.

Which costs are rising the fastest? How much are they rising? And how long will this last? These questions help determine cash needs and customer pricing in the future.

Right now, costs are rising, and the reasons aren’t that complicated.

“Demand and supply is driving inflation,” said Mark Zandi, the West Chester–based chief economist at research firm Moody’s Analytics. “Demand is coming up because the economy is coming back to life. Supply is constrained because of the pandemic. It’s trying to catch up.”

You can’t just take the world’s biggest economy offline and then expect it to reboot without hiccups. Most experts such as Zandi and those at the Federal Reserve expect inflation to come down over the next six months or so as supply-chain issues get resolved and the world recovers from the pandemic.

But so far that hasn’t been the case. All of my clients are facing inflationary pressures, and the smartest ones are keeping a close eye on the data.

Where are they getting this data? The media like to follow common inflation indicators such as the consumer price index (which increased 5.4% on an annual basis as of last month).

But if you’re running a business, you need better information. You need to know the price increases of the core materials that are critical to your business and industry. The good news is these metrics are available. You just have to dig a little.

The place to go is FRED — an economic database maintained by the research division of the Federal Reserve Bank of St. Louis. The FRED database has more than 765,000 economic time series from 96 sources and can be found at fred.stlouisfed.org. Once there, search for “PPI” or “Producer Price Index.” You’ll have plenty of data to digest.

From this data, look at these seven core metrics that are driving the costs of running our businesses.

The first is the cost of plastics and resins, which are used in everything from containers and chemicals to packaging and instrument panels. According to FRED, these costs have increased a whopping 46% since the same time last year.

While on the topic of plastics, I also like to examine the costs of plastics packaging film and sheet manufacturing, which drives the cost of the packages for our products. These prices have increased 30% during the same period.

I also look at the cost of iron and steel, which are the core ingredients in most building and manufactured products. Iron and steel prices have increased 90%, almost double since the same time last year.

There’s also plywood, a key material in construction that has risen — get ready — more than 102% since last year. And of course, the costs of industrial chemicals, which are pretty much used in everything we make and consume. Chemical costs have increased 45% over the last 12 months.

Finally, there’s the cost of general freight trucking (an increase of 21% since August 2020), and, of course our biggest cost component, which is labor. Here you’ll find that the average hourly earnings of all employees working at private companies have increased from $29.37 per hour last summer to $30.54 per hour today or about 4%.

These indicators are the ones most of my clients follow — but they’re not limited to seven. FRED has hundreds of producer price indexes covering all sorts of things, from hot rolled steel bars to hydraulic fracturing sand, so depending on what your business does you may want to include more relevant data in your regular review of prices.

Notice something? Yeah, that’s right: These costs are way more than the 5.4% consumer price index increases reported by the government so far. None of that bodes well for shoppers in the not-so-distant future. Businesses, however, are scrambling to mitigate these increases, and they’re doing so in two ways.

The first is watching and analyzing for trends. We’ve seen significant increases in these core materials and services over the last year. But by looking at the timeline of the data you can start to see whether those costs are beginning to even out as the world’s supply chain recovers. For example, plywood prices are starting to decline, and the cost of freight seems to be leveling.

The next thing they’re doing is reacting. If the trend of increasing prices continues to be significant, then that’s reason to revisit your own pricing as well as take certain steps to control overhead, such as locking down long-term agreements with suppliers, key employees, landlords, and banks to keep these costs under control.

It may also spur more purchases — if possible — of inventory, property and equipment, which are assets that historically hedge well against rising inflation.

“When prices go up, you can make money,” Zandi said.

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