Predictable price increases are expected

Three months ago we said that plant engineers wouldn't have to worry too much about higher prices ahead. Despite the fact that wholesale prices across the entire economy are rising, we stand by that prognostication.

Indeed, we expect industry prices will increase, but will do so at rather sedate and predictable rates. Consider, for example, the industry that makes pumps and pumping equipment. Here, prices are expected to rise 2.15% in 2004. The pumps industry will push through the highest average product price hike of any industry in our factory equipment and tools market basket.

Despite that fact, price hikes will be held at 2.15% or below. Cost pressures on pump manufacturers and others will continue to grow. The pumps industry saw its production labor costs increase 2% in 2003 while energy costs grew 9.86%.

Evidence suggests that labor and especially energy costs will exert significant inflationary pressures on manufacturers over the next six months. That's bad news: the handsaws industry suffered the largest energy cost hike in 2003 (up 18.58%), and the process control instruments industry saw the smallest cost spike (up 5.85%). As crude oil prices extend to $40 per barrel and higher, cost pressures will be rising.

In some cases, higher energy and fuel costs will make a terrible margin situation even worse. Low-tech industries that make handsaws and high-tech transformers manufacturers will both endure the most challenging pricing environments. To restore manufacturing margins to average levels held over the last five years, handsaw makers and transformer producers need to increase average prices by 4.1% and 5.3%, respectively. Alas, we forecast prices in 2004 to rise only 1.7% for handsaws and 1.2% for transformers.