Despite the government’s (and many customers as well) insistence that inflation is non-existent, I think it’s time to start preparing for the inevitable. Our industry has gone almost 4 years – yes, 4 years without a price increase. It might not be tomorrow, but I’m willing to wager we’ll see a price increase before the year is over. As a wise industry veteran told me recently, “I’m sure the letters are written and everyone is waiting for the other guy to hit send.”
The drop in oil gets all the headlines. As I’ve written before, other factors are stopping freight rates from dropping. Net, freight rates are about the same as they’ve been. Pulp remains near record highs. A few paper mills have recently sent out price increase letters. For those of you that don’t follow the paper industry closely, remember that Verso and NewPage merged. Dust off Porter’s Five Forces again and look up “bargaining power of suppliers.” Heck, you don’t even need to. One less supplier = better bargaining power. Skip the Harvard MBA and send me what you think that tip is worth. To much fanfare, Wal-Mart announced it is raising its employees wages over the next several quarters. Expect to hear more large companies follow suit.
Call me a cynic but the real driver behind inflation is good ol’ Uncle Sam. As Milton Friedman wrote, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” The government has been trying to spur inflation with low interest rates for years and it’s finally starting to take hold. Inflation serves many political purposes. First, for most people, inflation feels like a raise. Even if the money is spent on the same lifestyle, people see bigger numbers in their paychecks and feel better about things. Second, and most importantly, inflation is the best way out of our little debt problem. The $18 trillion we owe (it’s going up every second) becomes less painful to payback with inflated dollars. Remember, inflation benefits debtors, not creditors. We’re a debtor.
Start preparing your customers for the inevitable inflationary environment we’re going to see. If you don’t, be prepared for margin degradation. You have a choice. Don’t make the wrong one.