Inflation now taking hold
Inflation is running full throttle now as evidenced by the PLANT ENGINEERING construction and maintenance indexes. In the 12-month period ending August 2004, our price index increased 7%, which is up from a meager 0.8% inflation rate in 2003 and 0.1% in 2002.
Higher prices are boosting margins for only five supplying industries. Nine are still showing near record low manufacturing-related margins and the rest are in the mediocre “average” category. The fact that costs of manufacturing have kept pace with prices accounts for this reality. Over the same 12-month ending August time periods, our cost index escalated to 7.1% in 2004, up from a 2.2% inflation rate in 2003 and a 0.9% cost decline in 2002.
Softwood prices earned the top prize in our inflation derby. Softwood buyers faced a massive 17.1% price hike in the 12 months ending August. This price trend was unusual as it was driven by institutional factors like tariffs on Canadian lumber.
Among the average price hikers, the paints industry raised its prices 2% over the same 12-month period. With a “C” margin grade, plant engineers who haggle over prices will find cost/price escalation analysis to be a negotiation wildcard. Short-run analysis favors suppliers while long-run analysis favors buyers.
End-market growth among paint-buying industries is solid, but not strong enough to give suppliers any extra clout. Marketplace acceptance of price hikes appears to be growing with tags escalating at their fastest year-over-year pace since early 1998.
Another industry with a stronger case for higher prices is the sheet metal work industry, Since August 2003, per-unit steel spending increased 47.6%. This gain accounts for more than two-thirds of all materials-related inflation among sheet metal companies.
|Construction & Maintenance Supplies||Average Product Prices % Change During 12 Months Ending||Direct Manufacturing Costs and Margins Grade||Growth in U.S. End Markets % Change During 12 Months Ending|
|Industry||May 04||August 04||Costs are||Grade||May 04||August 04|
|1 Average product price changes are calculated from the producer price index for each 4-digit SIC (standard industrial classification) industry from the U.S. Bureau of Labor Statistics.
2 Analyses of each industry’s direct manufacturing cost changes are from Thinking Cap Solutions, Inc.’s proprietary Industry Cost Escalation (ICE) model. The “grade” indicates that recent price/cost changes have produced record high (A+) margins to average margins (C) to record low (F-) margins for the average producer in an industry. Grades of A to A+ mean plant engineers may be able to strike a better bargain with suppliers and better control plant costs.
3 Growth in U.S. end markets data are from the ICE model and are estimates of output for the domestic end markets which purchase a given industry’s products.
All data prepared and presented by Thinking Cap Solutions, Inc., Port Angeles, WA (telephone: 360-452-6159; e-mail: firstname.lastname@example.org).
|Wood windows & doors||0.33||0.51||rising||F||-0.51||0.83|
|Other millwork (excl. windows & doors)||-0.38||1.01||rising fast||F||-0.31||1.10|
|Shelving & fixtures||0.04||0.25||rising||C||0.63||1.55|
|Sewer pipe & other structural clay prod.||5.08||3.83||stable||C||-3.94||0.19|
|Fiberglass & other mineral wool||-0.36||0.23||stable||A||0.17||1.48|
|Iron & steel pipes & tubes||7.60||6.34||rising||A||3.26||5.94|
|Metal & plastic plumbing fixture fittings||0.32||0.42||stable||F-||3.02||4.47|
|Metal windows & doors||0.83||0.84||rising||F||1.10||3.30|
|Sheet metal work||1.07||1.15||rising||F||-0.95||0.76|
|Current-carrying wiring devices||0.39||0.22||stable||F||1.16||2.17|
|Noncurrent-carrying wiring devices||-0.28||-0.47||stable||F||6.22||7.84|
|Nonresidential electric lighting fixtures||-0.72||-0.54||rising||A||6.22||7.84|
|Automatic environmental controls||1.70||1.96||rising||C||-1.42||0.14|