Everyone knows that inflation right now is the highest it’s been in 30 years, which is shocking. Nearly all of my friends who run businesses can’t find workers, and they are paying dramatically more for those they find. The Toledo Blade picked up a story that showed one in five workers expect raises of 10% or more the first of the year, which is also shocking.
So what’s going on? We dealt with this with a wood pricing surge last year, but those prices came down significantly. But now it seems we are dealing with material shortages and price increases on nearly everything. Associated General Contractors reported that contractor costs rose 26.3% overall from June 2020 to June 2021, an astounding number. Mortenson reported that costs jumped 7.1% from September to October of 2021. Our clients are surprised and distressed at the price increases, and we don’t like them either.
Clients are asking me what they should do. With wages continuing to go up significantly due to labor shortages and materials going up due to supply and demand, I have difficulty advising clients that prices will come down. If anything, it seems advisable to lock in on prices now to avoid future increases and material delays, which we expect.
Last week, we had our board meeting, and I asked them their perspective on the economy. It’s booming right now, so demand is outstripping supply, creating issues. There are $4.6 trillion dollars of liquidity sitting on the sidelines versus $3 trillion normally, much of which people want to spend, increasing demand. The federal government keeps pumping money into the economy, and M2, a measure of liquidity in the economy, has increased dramatically, devaluing the dollar and increasing inflation. It was the boards’ opinion, and they are all dealing with wage and material cost increases, that inflation is here to stay, and that we should plan to run our company in an inflationary economy. Believe it or not, I remember those days from the early 80s. Clients would call us every month and ask us how much the price increased on their projects. We managed to the inflation, but it wasn’t easy or fun.
The good news is that though costs are increasing, rents will increase, which will keep projects feasible. But interest rates could follow inflation, which could produce more headwinds. And I remember in the early 80’s when President Reagan decided to fight the inflationary trends and how painful it was for everyone in the country. I don’t want that to happen again.
So my conclusion is that inflation is here to stay until someone does something about it. The labor and demand pressures are just too strong to allow for abatement in inflation. So the best strategy is to deal with it as best we can, controlling prices where we are able, affecting early procurement, and planning appropriately. We can’t control the macro, but we can control the micro to a certain extent.
Peter Douglas, P.E.
The Douglas Company
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