Living With InflationByRaymond D. Matkowsky
On the 10th of February this year the Bureau of Labor Statistics (BLS) reported that the year over year inflation level was 7.5%. This is the highest (officially reported) it has been in the last forty years. It was almost twice as high in the 1970s, but for most people this is the highest they can remember.
The reported inflation level is probably artificially low because of the way it is calculated. The BLS uses “Owner’s Equivalent Rent” (OER) assumptions in their housing cost calculations. In other words what it would take an owner to rent an equivalent house. From January 2020 through the third quarter of 2021, OER only grew 4.8%. During the same period home prices increased on average 24%. It is a very big discrepancy. This is a big deal since this is the single largest expense for most people. The true level of inflation is probably north of 10%.
Any inflation is a problem. To give you an example, to buy the goods that US$100.00 would get you in 1947 would now require US$1,261.00. As one author recently stated “Inflation is a slow-motion theft.” How much inflation is OK? Some inflation is necessary to avoid even more dire financial distress, but it is still theft.
Everyone is affected by inflation! Some people say that I’m not in the market for a new car or a house. How about the plumber you call to fix a leaky pipe. He needs a new work truck. He is probably going to raise his rates to cover his increased costs.
What Is An Acceptable Level?
The United States and every country of the world need some inflation to keep its economies strong and to forestall deflation (negative inflation). However, what is enough? There is a whole range of thoughts. Historically, it has been 2.0%. Some experts are saying the number should be 4.0%. Inflation has been running around 1.5% over the last few years. Has something bad occurred because of it?
The average pay increase in 2021 was 3.4%. This was almost 2.0% greater than inflation. Companies are having a hard time filling positions and holding on to their present employees. Employees are leaving for many reasons, but generally they are getting an increase in pay when they do. If inflation is allowed to run about 4.0%, is the average employee going to expect a 6.0% raise? Furthermore, you do not want your employees to fall behind inflation. One way or another they buy your products. If they can’t afford your products, you are the one that is going to suffer.
In my opinion, a 4.0% inflation level is not acceptable to business. Inflation should be as low as possible with future benefits in mind. I remind you, inflation is “slow-motion theft” to more than just the final consumer.
Living With Inflation
Whatever the number is, we are all going to have to live with inflation regardless of where in the world we reside. The answer is simple, cut your costs more than inflation. Every company will be different. However, cutting costs maybe a lot simpler than you think. Let me give you some real life examples I have come across over the years.
Most businesses have quality control procedures. Samples are usually taken from production runs before the product is released. The sample is placed in some type of container and sent for testing. The container can be as simple as a jar to more complex glassware.
Many times this container is discarded after use. Very often all that is needed is a quick rinse and the container can be set aside for drying. The container can then be reused, even many times.
The second example that I want to give you deals with cardboard boxes. Every company receives materials that come in cardboard boxes. These boxes are discarded in bins that are picked up by a refuse company that measures its bin in cubic yards (0.765 cubic meters per cubic yard). If the boxes are not flattened, the bin fills up quickly. By flattening the boxes you could reduce pickups to once week, possibly once every two weeks, lowering your refuse costs.
In each case the immediate savings is small. However, over a year it can be significant. As I mentioned previously, every company will be different, but look for small savings that may have been overlooked in the past. Small savings grouped together will add up to a large saving. They will be more frequent than the big ones.
Remember, every penny saved goes right to your bottom line. Every penny saved is a penny more in profit!
Do you have any comments or other suggestions, please share them with your fellow readers. Email me at rdm@datastats.com.
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