It is a way to take people’s wealth from them without having to openly raise taxes. Inflation is the most universal tax of all.
- Thomas Sowell, American economist, historian, and social theorist
Episode Summary
In this week’s Dial P audio podcast, Kelly Barner gets back to basics to address one of the dominating news stories and business concerns today: inflation. What is it, what causes it, and isn’t there SOMETHING we can do to make It stop??? Listen in for a refresher on the basics, some examples of how it connects all of the different major forces in the economy, and some strategies and tactics you can employ as a corporate employee to get through today’s heavily inflationary times.
Episode Transcript
Intro/Outro (00:01):
Welcome to dial P for procurement, the show focused on today’s biggest spin supplier and contract management related business opportunities. Dial P investigates the nuanced and constantly evolving boundary of the procurement supply chain divide with a broadcast of engaged executives, providers, and thought leaders give us an hour and we’ll provide you with a new perspective on supply chain value. And now it’s time to dial P for procurement.
Kelly Barner (00:32):
Hi there, and thanks for joining me for Dial P for procurement. Part of the supply chain. Now family of shows, I’m Kelly Barner, a career procurement practitioner with a love for business news, and most of all good ideas, no matter where they come from. In addition to video interviews and live streams, I’ll join you each Thursday to share my point of view on a current news story that presents an interesting twist for business leaders or a new way of looking at a common challenge. Before I dig into this week’s topic, we’re are building out dial piece independent following. So no matter where you encountered this podcast, I’d ask you to subscribe or follow and even give us a review. Thank you in advance for being an active part of our listening community. I talk to people all the time that ask me what are chief procurement officers focused on right now for the last six months or so?
Kelly Barner (01:24):
That has been a very easy question to answer. They care about inflation, fuel prices and labor shortages. Yes, they have other concerns like supplier diversity and sustainability, but neither of those come anywhere close to their focus on inflation and since fuel prices and labor shortage is, are related to inflation. Most CPOs have a one track mind right now and who can blame them. Speaking of blame, did you know that you might be contributing to inflation all that talk and worry about inflation might cause inflation. Don’t worry. I’m doing it too more on that in a minute. We’re all so bombarded with news stories about inflation that we can’t deny its importance, but when was the last time you really dug into how inflation works? It has been a long time since I was in business school and warning flags go up in my mind, whenever something is sensationalized and politicized.
Kelly Barner (02:21):
And that seems to be everything these days let’s revisit the basics on inflation and then consider how our everyday decisions might actually be contributing to it. We are currently in the midst of the highest inflation spike in 40 years in March of this year, the inflation rate was 7.9% up by 0.8% from the previous month. Now any analysts expect that the March number due to be released on April 12th will be closer to 10%, which means that inflation is not only high, but its growth rate is also accelerating. Inflation is the overall increase in the cost of living or prices paid over a given period of time. In other words, it determines what your dollar or your paycheck will buy you compared to what the same amount of money could buy last month or last year in times of high inflation, like we are in today, prices are up and therefore the same dollar you held a month ago will now buy you less stuff.
Kelly Barner (03:22):
Inflation is measured and tracked through the consumer price index or CPI. This is a market basket consisting of consumer goods and services. The bureau of labor statistics is the government agency that tracks and reports on the CPI and inflation. It includes housing, energy, food, new vehicles, medical care, and services. Every month. The bureau of labor statistics releases the inflation rate from the previous calendar month. The largest percentage of the CPI is associated with housing, but housing is also typically pretty stable. Most of the volatility in the CPI and therefore inflation is associated with two F words. No, not those F words. I’m talking about food and fuel. So what exactly causes inflation? There are several things that can contribute to the inflation rate for instance, too much available cat Ash in the economy. Consumers sat on many of the stimulus checks they received during the pandemic as did states and local governments.
Kelly Barner (04:28):
And once life started going back to normal, everyone started spending leading to spikes and demand and an increase in inflation. The increase was small, but it was still worrisome. People started to take notice some organizations, including the San Francisco fed began voicing concerns about government decisions, overheating the economy by fueling demand that businesses couldn’t fulfill inflation was already on the rise in late 2021 when the American rescue plan was passed, but that increase was expected to be contained and temporary. For many Americans, the federal stimulus checks were a lifeline in an economy completely scrambled by the pandemic for others. They created an opportunity not to hurry between jobs. This is where we get one of our first points of connection. The cash that increased the rate of inflation, albeit subtly through surplus money is the same cash that drove and is still driving labor shortages, especially for Americans whose income can be close to replaced by the stimulus.
Kelly Barner (05:34):
Transitory was the word frequently used to describe the increased inflation rate late last year and early this year. And that might have been the case if no other factors had contributed to its progression, but you just never know what’s around the corner like war in Eastern Europe. For instance, that brings us to another driver of inflation supply shocks supply shocks that disrupt production or increase input costs like fuel for instance, are bad for inflation. The war between Ukraine and Russia is driving up energy costs. And that in turn is driving inflation up far more than the stimulus checks did. And it’s having an impact on top of that already elevated inflation rate as consumers, we’re all subject to the pains caused by inflation. It costs more to fill our cars with gas, shop at the grocery store and pay rent. Also devalues any increase in pay we receive at work pay raises have to be larger than the rate of inflation to have an impact on our spending power and material quality of life.
Kelly Barner (06:39):
Now, this is not to say that someone can’t get a 10% increase in pay, but it certainly doesn’t happen all the time. A typical cost of living raise is about 3%. You may have heard that rule of thumb. Where does that 3% come from? That is the air quotes, typical rate of inflation. If the things you have to buy to live increase in price by a composite 3% annually, not getting a 3% raise means that you’re effectively making less when compared to your costs. So we’ve covered available cash, labor, shortages, and supply ch shocks. What about fuel prices? Fuel costs are definitely one of the top things. All executives are worried about energy prices in general and oil costs are very changeable. As of recording this podcast, a barrel of Brent crude costs about $110 a barrel, maybe a week ago, it was about $120 a barrel Wells Fargo’s team of economists recently sent out a paper about the implications oil hitting $200 a barrel, a number that sounds alarmingly high, but which is not unrealistic.
Kelly Barner (07:47):
In fact, they estimate that even if Russia’s oil production drops by 30%, we may hit $195 a barrel. What would the fallout of this be even higher and inflation? Of course. And if not a recession certainly reduced GDP and economic growth. Wells Fargo expects the inflationary impact to be different by country. With the us taking the worst, hit an additional 1.1% of inflation just from these fuel costs while China’s would increase 0.6% and the Euro zone would see 0.8%. Now, quick recap. Inflation is caused by fuel price increases, supply shocks, surplus cash, and how businesses and consumers respond to it. And news about it. The truth is we draw drive inflation, you and me and the lady who works at Dunkin donuts and the ups guy and everybody else, we are so good at driving inflation. We do it without thinking about it or realizing it here’s how starting at the highest level consumer expectations drive inflation.
Kelly Barner (09:00):
Now that’s your self fulfilling prophecy right there when people anticipate inflation or when they anticipate prices going up without thinking about it as inflation, they help drive inflation up by incorporating that expectation into negotiations for wages and into contracts for things like houses. Not only might we do that because we’re aware of the economic predictions for the rest of the year, but also because we feel the effects of inflation on our purchasing power. Before we change jobs or buy a car or buy a new house, we wanna be sure that the agreement delivers enough perceived value to make any cost, disruption, risk, or inconvenience worth it. And while that perception isn’t necessarily scientific and it varies person to person it’s bad for inflation, also bad for inflation switching jobs. It isn’t the mere fact to switching jobs that make inflation go up. It’s our collective individual decisions to seize these new opportunities.
Kelly Barner (10:01):
Usually at a higher wage that drives up the cost of filling those roles for companies, boom inflation in February, the labor department reported 4.4 million people had quit. Their jobs in that number was 4.5 million. And that was a 20 year high. There are currently 1.8 open jobs for every available worker, making the competition for talent, fierce and expensive. Higher wages are great for the individuals getting them. But remember what we said about justing power. If those people aren’t getting a 7.9% increase in salary from one job to the next, they are actually worse off and they’re contributing to inflation the war for talent. As some people are calling, it is creating great opportunities for some people, but increased costs for everyone. How else are we all driving inflation? How about where are we driving inflation? Like at the grocery store, remember that’s our other F word food.
Kelly Barner (11:07):
Conventional wisdom says that the best way to combat the cost pressure of inflation on consumer goods is by building up strong brand and customer loyalty. Add to that. The fact that supply shocks are making usually easy to get products, pretty scarce, and you have a perfect storm for brand switching. According to a recent wall street journal article brand loyalty takes a hit from inflation and shortages by J one Kang between may of 2020 and August of 2021, 70% cent of us shoppers reported buying a new or different brand than they would’ve purchased pre pandemic. I’m sure you remember, those days, get hand soap, any hand soap or buy breakfast cereal, anything so long as it doesn’t have berries in it. And if the only challenge had been the pandemic, as soon as our regular brands came back into stock, most of us would’ve switched back.
Kelly Barner (12:00):
When we add inflation on top of the supply shocks, the trend becomes more widespread and lasting brands that have in stock percentages between 72 and 85% have law, almost an entire percentage point of share of wallet. That’s a metric that measures brand loyalty and shows whether companies are gaining or losing buyers. The grocery store chain Kroger did a survey that found that more than 90% of consumers say they will buy another brand or item if their preferred choice isn’t available. Clearly as all of these factors, collide, consumers are learning to adapt. And as we’ve seen with the trend around working from home, some of these new trends become new habits and behaviors and they never switch back. The fact of the matter is brand loyalty may never be the same, but we’re here to talk about inflation. And here’s what I, I wanna know. Can’t somebody do something it’s not like inflation is new for answers.
Kelly Barner (13:01):
We look to the federal reserve and their management of interest rates. The Fed’s job is to roll out fiscal policies aimed at stabilizing prices and guiding lending and borrowing behavior. Interest rates usually move in the same direction as inflation. Although with the delay because interest rates are raised or lowered in response to rising or falling inflation, making money more expensive to borrow, decreases the consumer impulse to spend on risky or unnecessary goods. And it helps market prices cool down by suppressing our demand. It’s an imprecise science to be sure, but it’s the best we’ve got today, as you would expect, the fed is raising interest rates in the hopes of containing or slowing increases in inflation. Usually they wouldn’t raise interest rates by more than a quarter of a percent each time. Going back to that imprecise science idea, if they aren’t positive about the impact they’re changes, we’ll have more smaller changes are better than fewer bigger potentially harmful ones today.
Kelly Barner (14:02):
The concerns about inflation’s impact on the economy are significant enough that the fed has suggested they may raise rates by a half percent. Also sometimes stated as 50 basis points just to make all of this sound more serious and truthfully more confusing. And that’s just a half a percent at a time fed chair. Jerome Powell has hinted that we may see a total of 1.9% in additional increases over time before the year is out. Now, many of you, although not all listening to this episode of dial P work in procurement or supply chain. So you may be tasked with negotiating supplier contracts and prices for your company. As I’ve said, inflation is based on consumer prices and some of the inputs like fuel and raw materials are the same, but inflation doesn’t does affect companies a little bit differently. That is important for us to remember inflation mostly affects companies by affecting its customers, especially in B2C industries, as well as through the cost of capital that you get access to.
Kelly Barner (15:07):
We’ve already learned about the effect expectations have on with regard to inflation professionals must be careful not to follow the same approach in a corporate setting. We need to be looking at raw material indexes and building should cost models, analyzing market trends and talking to our key suppliers. We can’t afford to read consumer news coverage and just freak out the most important thing you can remember about inflation and the CPI is that they are measured focusing on consumer impact. It doesn’t mean we shouldn’t address them or that we won’t feel them in the corporate realm. We just have to remember that inflation driven cost increases are measured and felt at the consumer level. That’s where they’re the most applicable. And that’s where the most accurate when consumer spending power is decreased because the cost of goods and services is up relative to people’s income. They will make different choices about how to spend their limited resources.
Kelly Barner (16:03):
This means that demand for essential goods, like the apps, for instance, food and fuel are less likely to be affected than purchases of new cars, but even within the category of food, which we know is just as volatile as energy costs, you’re more likely to buy milk and eggs and bread, no matter how much they cost, then you are to continue springing for lobster and steak companies need to be sensitive to their target consumers ability to spend and wear their or most profitable products or services fall on the continuum from essential to luxury. And if you are a B2B firm, try to figure out how many tier away from you. The first consumer is that will suggest both how soon and how much of an impact you’re likely to feel from inflation. The devil is in the de tails and inflation is no exception. I’m not suggesting that you refuse to pay more at the grocery store or that you pass on the opportunity to negotiate a great new job.
Kelly Barner (17:03):
Neither of those choices will contain inflation. And all of this is systemic. If you think about all the different ways that supply shocks and fuel costs and labor and supply of money or interconnected, it’s far more complicated than anything that any one individual or corporation can affect. But the more you understand about where inflation comes from and how interconnected the sources of it are, the less susceptible you will be to the breathless over hyped news stories about it. That’s my eye point of view. Anyway, thank you for listening to this audio episode of dial P for procurement, but please don’t just listen, join the conversation and let me know what you think on this topic or others. I can take it. Let’s work together to figure out the best solution until next time. This is Kelly Barner for dial P for procurement on supply chain. Now have a great rest of your day.
Intro/Outro (17:58):
Thank you for joining us for this episode of dial P for procurement and for being an active part of the supply chain. Now community, please check out all of our shows and event@supplychainnow.com. Make sure you follow dial P four procurement on LinkedIn, Twitter, and Facebook to catch all the latest programming details. We’ll see you soon for the next episode of dial P four procurement.
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