In the past few weeks, the government released its inflation numbers. The U.S. Bureau of Labor Statistics reported that consumer prices, on an annualized basis, have increased 5.4 percent. The same department also reported that producer prices have increased annually at a rate of 8.6 percent.
It’s “temporary and inflation will recede to normal levels in the not-too-distant future,” Janet Yellen, our Treasury Secretary, said in August.
It’s “frustrating,” Jerome Powell, our Federal Reserve Chairman said this month after also calling the situation “temporary” back in August.
The government would like us to believe that higher prices are just a short-term bump caused by COVID-related supply chain issues. But it’s not just that. And it’s certainly not a passing bump. People running businesses know this. My clients are seeing price increases that are much higher than what the government is telling us.
That’s because they don’t pay attention to the broad-based inflation numbers that the Bureau of Labor Statistics releases. Instead, they look at the actual costs of the actual materials and labor they are spending to make and then deliver their actual products. And those very specific costs have skyrocketed well beyond the generalized rates released by the government that the media reports. As I visit client after client and look at their purchases, payroll, payables and income statements I’m seeing it too. 5.4 percent? 8.6 percent? LOL, I don’t think so.
Here’s what my clients and I are seeing.
We’re seeing that the cost of producing plastics and resins - core materials used in many manufactured products - has increased 44.6 percent over the past year. Think automakers are having it tough finding chips? That’s the least of their problems, because iron and steel prices, which get used in so many auto components as well as in construction and equipment manufacturing have increased a whopping 96.3 percent in the same period. The price of chemicals, which are used in just about everything, has increased 15.6 percent. Put it all together and the costs of manufacturing products in this country have increased 15.2 percent over the past year, with no relief in sight.
Things are no better in the construction trade, where the cost of gypsum - a core material for cement and drywall, as well as for building roads and highways – has increased 25.3 percent and the prices of construction materials are up 28.8 percent.
And that’s just to make all this stuff. Shipping costs are up 17.3 percent by sea and 20.2 percent by land. Corrugated paperboard and un-laminated polyethylene film costs – major components in packaging materials – are up 18.2 percent and 28.2 percent respectively over the past year.
Of course, these things don’t just magically come together. Manufacturing and construction activities need people. So do service firms. And already we’re seeing the costs of labor skyrocket. Hourly wages are up almost 5 percent since last year. Service industries are reporting as much as 10 percent increases in compensation. Many other companies are now bumping up salaries anywhere from four to six percent. Hiring bonuses are now becoming common to attract workers. None of this includes the un-reported compensation increases related to the costs of more vacation, time off, health insurance, retirement plans and other perks and benefits that are needed to maintain our current workforce and attract new workers.
These are not predictions. These numbers represent actual money being paid by actual businesses – my clients - already this year. These are the core expenditures - materials and labor - that make up the gross margins of products. And, as you can see, these expenditures are significantly higher than the 8.6 percent producer price index that’s being reported by the government. And once they go up, they’re not going to go down. These are not commodities we’re buying. We’re not going to reduce the wages we pay.
So what are businesses doing to mitigate these enormous increases in their expenses? Some of my clients are scrambling to locate cheaper materials, snapping up inventory wherever they find it and storing it wherever they can. A few are practicing “shrinkflation” – delivering less product and services for the same price (a practice long employed by many major brands). Others are negotiating long-term agreements with their suppliers (as well as their landlords, key employees and bankers). The smartest ones are investing in technologies to replace their higher-paid, high-maintenance employees.
But everyone I know is raising prices.
Because in the end, an income statement is only based on two things: Revenues and expenses. Overheads and administrative expenses can only be cut so much. As costs rise - and as you can see they’re rising at a rate well beyond what most of us hear in the media - then businesses will need to raise more revenues to maintain their profitability. Those revenue increases will inevitably come from price increases.
Are these increases caused by supply chain challenges? Labor disruption? Excessive government spending and increased money supply fueled by cheap money and an over-capitalized federal reserve bank? It’s all of these factors. But if you’re running a business that’s not important. What’s important is that the inflation numbers that we’re reading in the major media are significantly understated. Prices are actually higher than the government wants us to know. And they’re going to continue to increase.
But the people running businesses already know this. Just ask them.
• Gene Marks is a CPA and owner of The Marks Group, a technology and financial management consulting firm that specializes in small- and medium-sized companies.