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Source: DISC Corp.

Price Inflation as an Element of Recovery

May 26, 2021
As the broad recovery continues for the verticals we serve — construction, industrial, institutional and utilities – inflationary price pressures are obfuscating true performance.

2020 was unnerving at best and devastating at worst. The onslaught of the COVID-19 pandemic resulted in unprecedented sickness, job loss, societal shutdown and, sadly for many, death. Fortunately, our industry was deemed essential by the Cybersecurity and Infrastructure Security Agency at the beginning of the pandemic and continues to be critical to our country’s economic viability. Without the uninterrupted ability to build, maintain and repair electrical systems that power, control, measure and communicate our daily activities, we would likely be in a far worse business state.

As the broad recovery continues for the verticals we serve — construction, industrial, institutional and utilities – inflationary price pressures are obfuscating true performance. Looking back at January 2020, we were forecasting that our industry maintains a modest and regular growth pace through 2023. Then the pandemic entered the picture, and the estimate for the overall electrical distribution marketplace for 2020 fell quickly behind 2019 year-over-year (YOY) performance by -9.5%. Our 2021 April forecast is for robust +14.3% YOY growth. Looking at these numbers without any larger context, it’s tempting to think that 9.5% subtracted from 14.3% means that we are effectively showing +4.8% growth over the pre-pandemic numbers, as illustrated in the following graph. However, this can be deceptive because the inflationary price bounce is absorbing a large portion of the growth gain. Just because you are selling more dollars doesn’t mean that you’re making more money or selling more stuff. As an example, 500 pounds of copper today is worth about what 1,000 pounds was at this time last year. It’s all about current pricing and inventory valuation.

The impact of prices. For the April 2021 outlook, the 2020 price shows a YOY decrease of -2.4% from 2019 levels. Conversely, the current 2021 forecast has prices rising +7.6% YOY. In a broad sense, prices are moving higher as demand continues to improve, and supply is unable to keep up the pace. Using the same logic as the forecast above, subtracting the 2020 drop from the 2021 rise (7.6% minus 2.4%) leaves us a +5.2% price increase over the pre-pandemic price levels, as shown in the following graph.

This number correlates to a large extent to the forecast growth. Why not one-to-one? If we used the one-to-one logic, our sales would actually be off from pre-pandemic by the difference between sales growth and price inflation.  The often-forgotten factor is preexisting inventory selling at cost-plus without concern for replacement value, driving higher velocity sales, meaning price now is not the same as price before and should not be treated as such. 

Pricing as a component of the DISC forecast. While many factors impact prices, we identify three main causes for the current price increases: Supply chain disruption, commodity inflation and employment. COVID remains problematic in many parts of the world impacting imports. Jobs are going unfilled – truckers, dock workers, warehouse workers, factory workers and people not going back to work to stay home with children. Economically, we cannot keep up with demand because companies are unable to fill the open positions. To complicate this, commodity prices have been climbing at a very brisk pace. The following pie chart shows the components and percentages of the commodities and equipment that comprise DISC price forecasts.

The graph below illustrates the impact of the current inflationary cycle on key commodities in our forecast. 

The current inflationary cycle impacts more than our industry. The Consumer Price Index (CPI) is up +4.2% from one year ago. We have not seen an increase like this since September 2008. During that year, energy costs increased +29.3% annualized, mostly fuel oil and gasoline, which contributed to this bump. To moderate inflation, the government can deploy wage and price controls. Another option is contractionary monetary policy that reduces demand by curtailing the supply of money through increases in interest rates and decreases in bond prices. We are beginning to see wage and price controls through new tax and employment policy. Changes to monetary policy and the Federal Funds rate (currently 0.00% - 0.25%) are not far behind.

The key takeaway from this article is to protect your below-market owned inventory by pricing to current market (replacement cost). Understanding the economic recovery and the upswing in sales being driven by prices is also an important consideration. Lastly, remember to keep the rainy-day fund flush as interest rates on credit facilities (loans, investor cash infusions, long- and short-term debt, etc.) may soon be used as an inflationary control measure.

Christian Sokoll is president of DISC Corp., Houston, the electrical market’s leading provider of sales forecasts and related market data. He can be reached at [email protected] or 346-339-7528.


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