CPI Continues to Increase; How do Manufacturers React?

The CPI, or Consumer Price Index, measures the change in prices of consumer goods and services. The index is released monthly by the Bureau of Labor Statistics for the United States, although data specific to certain geographic areas is also available.

In August 2022, the CPI increased 0.1% due largely to heightened food and energy prices. Offsetting most of these increases was a decrease in automobile fuel costs of 10.6%. While this seems to be generally welcomed news, the CPI has increased 6.5% when annualized, more than three times higher than the Federal Reserve’s target inflation of 2%. Rising costs are still affecting consumers and businesses considerably.

Although some manufacturers may not sell directly to consumers, the CPI can provide several insights useful for manufacturers. Considerations include the following:

• Despite a drop in automobile fuel costs of 10.6% last month, fuel prices remain 25.6% higher than costs in August 2021. Manufacturers may notice this via freight bills for hauling goods to or from their facilities. Optimizing shipments, researching and pursuing alternative freight methods, seeking suppliers in close geographic proximity, and negotiating prices with both suppliers and customers are tactics manufacturers may consider in managing this cost.
• Despite relief in the monthly CPI report, inflation is continuing, with costs of consumer goods and services continuing to rise. Specifically, the CPI reports increases to the costs of goods including food, household goods, apparel, medical supplies, and recreational goods. These rising costs can affect consumer demand for manufactured goods as discretionary income is affected. As a result, manufactures should evaluate how this may affect demand.
• In addition to the rising costs of goods, it is expected that interest rates will also continue to increase. To control inflation, it is expected that the Fed will increase interest rates by 75 basis points in September. As interest rates rise, manufacturers and end users alike may face increasing costs and lower levels of discretionary income. Again, manufacturers should evaluate how this may affect demand.
• Further, with the increase of interest rates, manufacturers may consider their debt structure and capital budget. Notes with variable interest rates will likely see another round of increases in interest costs. Further, planned capital expenditures requiring financing may be reconsidered based on the projected actions of the Fed. Manufacturers must monitor their debt structure and capital budget spending closely to ensure they maintain proper liquidity and solvency.
• The CPI also indicates that supply chain disruptions are easing. Manufacturers continuing to experience significant disruptions may consider working with their suppliers to identify root causes and solutions for continued issues or alternative products that may prevent continued disruptions, especially those that are affecting the company’s ability to effectively service customers.

For questions about the CPI or the affect of the economy on your manufacturing business, contact a member of HBK Manufacturing Solutions at manufacturing@hbkcpa.com or 330-758-8613.