From Cfo.com: Experts may call consumer price increases ‘transitory,’ but fighting rising costs has become a priority for finance chiefs.
The U.S. Labor Department’s consumer price index stayed in heady territory in August. Prices for the basket of consumer products and energy goods rose 5.3% from a year earlier and 0.3% from July. Both of those numbers, though, were one-tenth of a percentage point lower than economists’ projections.
Some economists took the below-expectations results as a sign that the robust price increases of the spring started to taper off last month.
“Consumer prices rose by less than expected, supporting the notion that price pressures will — eventually — prove transitory,” said Stifel Chief Economist Lindsey Piegza in a note. “This morning’s report is a small victory for dovish policymakers who have remained steadfast in their message of inflation-dismissal and hesitant to insist a rollback of emergency measures is needed.”
Still, getting back to the Federal Open Market Committee’s long-run inflation target of 2% may take some time, Piegza admitted. “We’re still a ways away from achieving the Fed’s more benign inflation goal, particularly with some companies suggesting further price increases are coming down the pipeline as we head into the end of the year.”
Indeed, instead of waiting for inflation to cool down, CFOs are taking concrete actions to fight the increases in input and operating costs.
At industrial giant 3M, CFO Monish Patolawala sees broad-based inflation in raw materials, labor, and logistics.
On Monday, Patolawala told investors at the Morgan Stanley Laguna Conference that the conglomerate sees unprecedented inflation in polypropylene, ethylene, and wood pulp; labor inflation in outsourced manufacturing goods and “even in our own factories”; and increases in logistics costs. “Where you see port congestion, you see a lot of pressure on logistics costs,” Patolawala said.
“My belief, and I may be wrong, is until we see a demand-supply parity somewhere, I think [we’re] going to continue to see inflation in raw material and in logistics.”
— Monish Patolawala, CFO, 3M
While 3M has upped some of its prices, “unfortunately, inflation is higher than we even thought in the third quarter. So, despite taking price up, getting to positive, we are seeing inflation outstrip price,” Patolawala said.
Despite taking other actions like exploring dual sourcing, improving yields, and being cautious with spending, 3M projects an earnings headwind from inflation of $0.65 to $0.80 per share for the year.
“My belief, and I may be wrong, is until we see a demand-supply parity somewhere, I think [we’re] going to continue to see inflation in raw material and in logistics,” said Patolawala.
Bakery company Hostess Brands is experiencing mid-single-digit inflation in some areas, and last week CFO Brian T. Purcell said he has seen more inflation in the second half of the year.
At the Barclays Global Consumer Staples Conference, Purcell called out commodities, transport, and labor costs as the culprits. While Hostess had prepared for price inflation in commodities it can hedge, sales growth forced it to buy some commodities in the spot market at higher rates.
Purcell said the tight labor market is increasing Hostess’ labor costs. “When you’re in a tight labor market, you pay overtime, you do things like that, and it’s a dynamic environment. I think the team has done a very good job operating through that environment, but it is something that we’re keeping a sharp eye on,” Purcell said.
So far, Hostess has held the line on profitability. “We feel great about holding margins for the year in a pretty volatile inflationary environment,” Purcell said.
Worries over higher inflation, however transitory economists expect it to be, lead to dampened optimism among finance executives.
The AICPA’s economic survey conducted in August found that only a bare majority of finance executives (51%) expressed optimism about the U.S. economy over the next 12 months.
More than three-quarters of the finance executives (77%) said they were concerned about inflation, particularly raw material and labor costs. They also expected higher than normal salary and benefit costs increases. To improve recruitment and retention, 64% of the surveyed executives said their companies offered higher wages or salaries, while 46% said they were offering more flexible work arrangements.
To deal with inflation in other aspects of operations, according to the AICPA survey, companies are imposing price hikes, cutting costs, stockpiling materials and components, and renegotiating service agreements or supply chain contracts to lock in pricing.