Input Costs Are Rising – How Will You React?

What’s happening?

At first glance, we see that the US Producer Price Index (PPI), a measure of inflation for companies rather than consumers, was down 0.5% in December compared to December 2019. What that number does not illustrate, however, is that Prices have generally been creeping up since April and are on the verge of surpassing the year-ago level. This general rising trend in the PPI over the last eight months reflects increasing costs for material inputs, some of which are up rather dramatically.

When we assess the monthly prices for aluminum, copper, and steel scrap, the rising trend comes into sharper focus:

• US Copper Futures Prices rose from a low of $2.23 per pound in March 2020 to $3.56 per pound in January, an increase of nearly 59.6% in a span of 10 months.
• Aluminum Spot Prices rose from a low of $1.46 per metric ton in April 2020 to $1.99 per metric ton in January, an increase of 36.0%.
• The US Steel Scrap Producer Price Index is up 51.4% over the past eight months.

What are the implications?

Because the last few years have been predominantly characterized by deflationary pressures, we wanted to ensure that rising inflation was on your radar for 2021. It’s not just the base metals that are posting price increases as we enter 2021. Notable rise for commodities ranging from oil to lumber to corn is also occurring as the US economy rebounds from the 2020 recession.

Typically, upward cyclical movement in commodities prices coincides with business cycle rise for the US economy and the attendant increasing demand. We therefore expect the upside pressure on commodities will persist over the course of this year, in line with our expectations for business cycle rise for the US industrial economy starting in the second quarter.

What should you do about it?

You will likely feel inflationary pressures eating into your profitability in 2021 more than you did in 2020. In response to these developments, ITR Economics has been advising our clients to look for ways to increase their prices in 2021 in order to protect their margins. However, we’re not necessarily advocating for across-the-board price hikes. Each company should evaluate its unique customer base and selectively implement increases for those clients for whom it makes sense. Strategically raising customers’ prices will go a long way toward protecting your bottom line in 2021.