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The Inflationary Environment with Lauren Saidel-Baker

May 21, 2021

 

 

 

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Transcript by Rev


Hi. I'm Lauren Saidel-Baker, and welcome to this episode of ITR Economics Trends Talk. Thank you for joining me today to talk about prices. It's a subject near and dear to most businesses' hearts and, well, if it isn't near and dear to your own heart, it probably is to your sales Team. I wanted to talk about the inflationary environment today. And before I delve into deeply, let's start with one critical distinction, and that's the difference between consumer price inflation and producer price inflation. They might sound similar enough, but there are critical differences to note here. Now, if you just hear the word inflation or, say, read it in a headline, or from something from The Federal Reserve maybe, the obvious answer is consumer price inflation. That's the one we think about the most. But if you're a business and you're facing input costs, you're probably tracking more along with producer prices than with consumer prices, so it's important to know where you stand.

Now, directionally, both measures of inflation are in cyclical, rising trends right now but the magnitude is a critical difference. You can follow both the consumer price index and the producer price index in our ITR Economics Trends Report, where you'll note that the CPI for the most recent month of data came in 4.2% higher than the year ago level. That one 1/12 rate of change is actually the highest that it has been since 2008, but producer prices on the other hand came in a whopping 9.5% higher. And on a 12/12 basis, that is a phase B accelerating growth trend. So it's critical to know where you stand and where your input costs track more closely, whether it's CPI or PPI or maybe a more granular level, and we're happy to help you find that more granular indicator if you are interested. Please let us know.

Once you know where your inflation metric tracks, then you can start to make some critical distinctions. Now, as it's happening right now, you'll note that that PPI, producer price index, is overshooting the consumer price index. That's not unusual. In fact, in the post-great recession timeframe, PPI has tended to overshoot CPI both on the upside and on the downside. That makes sense to us logically. If you're a business facing consumers, well you're probably not reprinting the menu for every little change in your input costs. But if you're more selling into the producer side, that PPI side, well you probably are requoting prices every time you pick up the phone and have that conversation. So know where you stand and know where your customers stand, what they expect, because if you are facing input costs rising somewhere along with that 9.5% PPI measure but if you're only putting through price increases more in line with the CPI metric, that is a recipe for profit margin erosion.

It's no surprise that inflation is rising. I hope this doesn't come as a shock to anyone listening to this recording. We've had many Trends Talks talking about rising commodity costs that are accompanying some shortages right now, but also other cost inflation measures. Things like higher shipping costs, higher labor costs right now. So the question is, once you know what inflation measure to track, what can you do about it? Right now, the obvious answer really probably is the right one, and that's to put through price increases to your customers. Now, I know it sounds easier said than done but you might be surprised at your ability to put through these price increases at the moment, and that's because it's not just a you facing these higher costs.

It's also your competitors. It's also your customers. This is a very broad-based inflationary environment, so have those tough conversations. Anecdotally, we've been very surprised, pleasantly surprised even, to hear that there's much less pushback than there might typically be to price increases. And if you are having that tough conversation I'll give you one more tool, and that's to blame me. We are more than willing here at ITR to be that mean economist, to be thrown under the bus, that your economist told you you have to put through price increases. You have our trends report forecast for rising PPI in the future. And really that should be the evidence that you need to have those tough conversations to protect your profit margins this year and in the coming years. I wish you the best with those conversations, and for this episode of ITR Economics Trends Talk, I'm Lauren Saidel-Baker. Thanks. Let's talk more soon.

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Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.