U.S. businesses are dealing with growing inflationary pressures with rising input costs, material shortages, and unresolved supply issues being key drivers.
Among manufacturers, 86.4 percent stated that their primary current business challenge was an increase in raw material prices, according to a third-quarter outlook survey by the National Association of Manufacturers (NAM).
One of the roots of the rise in prices stems from energy fluctuations.
“Energy costs going up will affect everything,” Dan Eberhart, an energy consultant and CEO of Canary, a Denver-based oilfield services company, told The Epoch Times.
With input costs on the rise and instability in the air, many companies are unable to hold their quotes, making it difficult for manufacturers to plan and set forecasts. For instance, in the past, a supplier may have provided a quote of $80,000 for nuts and bolts, with the offer valid for 90 days. With so much uncertainty, there is a trend to set the quote based on the current price and not hold it. In other words, the quote is good until the end of the phone call, or the end of the day.
Shortages are another underlying cause for the increased expenses in raw goods.
“I have seen costs increase among suppliers, but what’s worse is the lack of availability of parts,” said Jon Quigley, founder of Value Transformation, which provides product development and project management expertise.
“It’s one thing to negotiate around the cost for a subassembly; it’s another thing to not be able to get that subassembly,” Quigley told The Epoch Times.
The increase in cost of supplies, coupled with shortages and major backups at main ports causing delays, is worrisome for consumers.
“The congestion at the ports is just like the congestion at rush hour,” Tenpao Lee, professor emeritus of economics at Niagara University, told The Epoch Times. “There’s nothing wrong, but it takes two hours to drive two miles.”
The effect is a result of the uptick in demand, which manufacturers are scrambling to fulfill.
“The short-term solution at the ports will be better management,” Lee said. If the demand remains, “the long-term solution is to expand the port capacity.”
Resolving the current issues won’t happen overnight.
Regarding the supply chain, “it’s going to get worse before it gets better,” Eberhart said.
The NAM’s outlook survey found that manufacturers expect a growth rate of 5.4 percent on average for prices of their products over the next 12 months. Manufacturers also predict a 6.5 percent growth rate for raw material prices and other input costs over the next year. Looking into the next year, 31 percent expected raw material prices and other input costs to increase by more than 10 percent.
Ultimately, consumers may foot the bill for these rises. The second-quarter survey indicated that 56.6 percent of manufacturers were passing some of the additional costs on to the consumer, while 34.5 percent of respondents said they were shifting most or all the additional costs to the consumer.
“With energy, labor, and logistic costs going up, it creates the perfect storm for consumer prices to go up,” Eberhart said. “Consumers should plan accordingly.”
Indeed, the Consumer Price Index (CPI) was up 5.4 percent year-on-year in September.
While the CPI is a reflection of the overall economy, individual sectors and products may see a distinct impact on prices.
“Some of the sectors will have a more severe inflation and some will have less inflation,” Lee said.
For some items, such as entertainment, boosting the price may cause consumers to not buy a movie, game, or ticket.
“If the item is elastic, or flexible, then consumers can switch to buy other things,” Lee said.
As such, segments such as entertainment may not see as much inflation. For sectors that have inelastic demand, like oil and food, the price may go up further. In these areas, the demand continues even if the price is high.
“No matter how expensive, you have to eat,” Lee said.
Some items in the grocery store that are produced locally may increase in price, but not as heavily as goods that are imported. Fresh fruit from a nearby farm, for instance, might have a lower cost than foods brought in from other countries.
While long-term solutions may ultimately increase stability and cause a shift away from inflation, for the time being, consumers might opt to deliberate needs and price-shop. If an item goes up, it could be time to ask the question, “Is this necessary?” It might be possible to switch to a different, lower-priced item, or do without for the short-term.
“A lot depends on what consumers believe about the product,” Quigley said. If they believe there’s no alternative, “they may accept the increased cost.”