Winds of inflation blowing strong

Smell the whiff of inflation? In the 12-month period ending September 2004, the average cost to make factory equipment and tools jumped 5.6%. That's a sharp detour from the no-to-low inflation trend that had characterized the past 10 yr. By comparison, costs to make equipment and tools increased just 1.


Smell the whiff of inflation? In the 12-month period ending September 2004, the average cost to make factory equipment and tools jumped 5.6%. That's a sharp detour from the no-to-low inflation trend that had characterized the past 10 yr. By comparison, costs to make equipment and tools increased just 1.6% in September 2003 after falling 0.5% in 2002.

For plant engineers on a budget, running from the stink of higher prices won't be an option. With F-minus margin grades for 10 industries in our equipment and tools market basket, sellers are under extreme pressure to hike prices.

Consider, for example, the top industry: hand and edge tools. Over the last 12 months, industry margins fell to a record low by losing $5.86 per $100 of product sold. This loss was the net result of a 12.5% surge in per-unit manufacturing costs and a meager 2.3% hike in output prices.

The cause of all the problems? Steel. Per-unit spending for steel shapes jumped 47.6% since August 2003. Second-tier concerns include ferrous foundry shapes and energy costs.

Margins most likely will exert significant upward pressure on prices in the near term.

Virtually the entire margin motivation for higher prices has developed over the last 12 months. Thinking Cap Solutions' analysis indicates tags must rise 11.4% in order to generate a fair return on manufacturing-related spending.

In 2005:Q1, suppliers will finally vent by boosting tags at least 1.7%. It's not likely that handtool makers will see anything close to an 11% price hike. But positive demand trends and sector-level capacity utilization data suggest competitive market conditions will prevail.

Price/cost/demand roundup

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 June 04 Sept 04 Costs are Grade June 04 Sept 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:
Hand & edge tools (except saws)0.040.34risingF-0.541.50
Saw blades & handsaws1.120.47risingF-0.241.26
Metal hardware0.390.68risingF-1.542.80
Mechanical power transmission equip.1.281.38risingF6.0910.37
Conveyors & conveying equipment0.870.91risingF-4.736.22
Cranes, hoists & monorail systems1.331.34risingF0.111.54
Industrial trucks (forklifts) & stackers0.861.01risingF--0.220.98
Metal cutting machine tools-1.29-0.75risingF5.547.02
Cutting & machine tool accessories0.260.37risingF-6.448.50
Power-driven handtools0.140.30risingF-2.333.20
Welding & soldering equipment0.600.83risingF-3.805.38
Pumps & pumping equipment4.914.35risingC2.864.02
Air & gas compressors0.740.87risingF-4.315.61
Speed changers, drives & gears1.801.85risingF-6.0910.37
Power & specialty transformers-0.220.09risingF2.243.66
Motors & generators0.380.30risingC5.206.92
Industrial process controls & equip.2.122.07stableA13.8715.25
Fluid registering & counting devices2.302.30risingB2.843.28
Instruments for electrical testing0.340.18stableA6.647.64

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