Each month, the US government reports on composite price changes. In case you missed it earlier this week, the US government reported that wholesale prices – as measured by the Producers Price Index – fell 0.6% in February (reported by Yahoo! Finance).
Part of a procurement professional’s job is to monitor his/her assigned markets to determine current and future price levels. This is done for a variety of reasons: to benchmark current prices; to determine the best time to enter into long-term, fixed price contracts; and to forecast pricing into the future so that the organization can make appropriate financial decisions.
So, what can you make of this week’s report?
Well, before I give you my take, let me walk you through how I’ve personally analyzed this data to arrive at my conclusions. Last March, the PPI bottomed out at 168.1. It is now at 180.9 – meaning that, in aggregate, commodity prices were nearly 8% higher in February 2010 than they were in March 2009.
Even if you heeded the advice of Supply Excellence’s Pat Furey in September 2009, your prices would be about 4% lower than they would be if you were just paying market price. Bravo, Pat, for being dead-on in your analysis!
So, what is going to happen in the future?
Well, there is no “crystal ball” or 100% accurate way of predicting future inflation. But some quotes in the Yahoo! Finance article give some expert insight:
- “Underlying price pressures in the United States remain very subdued”
- “Economists said they expect inflation pressures to ease even more in coming months”
- “Ian Shepherdson, chief U.S. economist at High Frequency Economics, said he expected the 12-month rate for core wholesale prices to dip from the current 1 percent to below zero in coming months”
- “Fed policymakers said they believed that ‘inflation is likely to be subdued for some time’”
To sum this up: if you didn’t lock in low prices in the last 12 months, you probably missed the boat on achieving some significant cost avoidance. However, with inflation to remain subdued or to reverse, now isn’t exactly the best time to lock in prices, either – you may be contracting at a price peak, which is the opposite of what you want to do: contract at a price trough. So, taking a watch-and-see approach is probably best at this point, being prepared to lock in pricing if you see signs of another bout of inflation or waiting for another price trough to become available.
Do you now understand a little bit more about why financial news matters to procurement professionals?
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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