22 minute read
SPECIAL SECTION • INFLATION IMPACT
Inflation and the Cost of Doing Business
Annual inflation rate in the United States accelerated to 7.9% in February of 2022, the highest since January of 1982, matching market expectations.
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Energy remained the biggest contributor — 25.6%, with gasoline prices surging 38%.
Inflation accelerated 4.7% for shelter; food 7.9%— the largest since July of 1981, namely food at home at 8.6%.
New vehicle costs increased 12.4%; and used cars and trucks 41.2%.
Excluding volatile energy and food categories, the Consumer Price Index rose 6.4%, the most in 40 years. The surge in energy costs due to war in Ukraine is still to come.
Recent developments in Europe coupled with the ongoing supply constraints, strong demand, and labor shortages will likely maintain inflation elevation for longer.
Source: U.S. Bureau of Labor Statistics
No one knows how long the current drift of inflation will last, but economists believe the trend could last for years, and the Federal Reserve agrees things may not be temporary. Even Elon Musk is talking about the pinch of inflation in the current national and global economic climate. In a March 13 Tweet, Musk said, “As a general principle...it is better to own physical things like a home or stock in companies you think make good products, than dollars when inflation is high.”
MicroStrategy’s Michael Saylor tweeted back, “USD consumer inflation will continue near all time highs, and asset inflation will run at double the rate of consumer inflation. Weaker currencies will collapse, and the flight of capital from cash, debt, and value stocks to scarce property like bitcoin will intensify.”
For those who are not billionaire entrepreneurs, owning a home and a small business is the backbone of lifestyle and livelihood. The federal government much shoulder blame for the inflated cost of doing business, having printed money to cover an unnecessary third stimulus package. Congressman John Carter (TX-31) weighed in on how perspective is important to the American middle and business class. “President Biden even asked Congress for more COVID money this week. It goes to show that this administration is disconnected with the real world and they can’t even see how bad their policies are hurting Americans.”
WHAT DO WE DO?
As business owners, unlike the inflationary spikes of the 1970s and 2008, companies have unprecedented volumes of consumer data as well as greater visibility and flexibility in the marketplace. Modern digital tools allow managers to turn data into decisions, which means there are new opportunities to see inflation as a strategic opportunity.
Instead of worrying about how much more to charge customers to pay your own costs, it is a good time to study how and why you are charging. Perhaps it’s time to study behavioral patterns and change price gaps to steer customers toward more profitable—rather than expensive—offerings.
IMPACTS OF INFLATION
ENERGY: A KEYSTONE
TO INFLATION AND INDEPENDENCE
The energy share of the consumer price index hike makes up about one-third of the 25 percent inflation the nation has seen since the start of 2020. While the fallout of the executive branch’s attempts at greener policies and lifestyles continues at the gas pumps, many remember the energy crisis of the 1970s—which was doubly impacted and inflated by fewer crude imports from the Middle East—and reflect on the loss of America’s status as a net energy exporter since then. Still, part of the jump in energy costs is organic; i.e., the return to expected levels of consumption following the record low demand during the pandemic lockdowns and peaks, and international factors that have nothing to do with government interference.
IT’S ABOUT INDEPENDENCE
While Americans tighten their belts and companies tighten their budgets, Todd Staples, president of the Texas Oil & Gas Association affirms that inflation and independence are undeniably connected. “This crisis should be a wakeup call that we need strategic American energy policy that treats oil and natural gas as an asset and not a liability. The suffering of consumers at the pump underscores the importance of domestic energy production, and American consumers are feeling the repercussions of canceled pipeline projects, delayed approvals for permits and the discouragement of additional expansion; poor decisions all exacerbated by the [Ukraine] war.”
In addition to crude, natural gas, coal, and electricity demand also fell during the pandemic with slowing economic activity. As the world moves beyond pandemic conditions, companies worldwide are not able to meet the rebounding demand, which accounts for cost hikes in food and gas prices.
As well, the massive number of at-all-costs energy buys mandated by the CCP for its domestic manufacturing is creating global demand and driving up prices on coal and natural gas everywhere. Without domestic production, the U.S. is just another country vying for the finite availability.
Meanwhile, in the United States, the oil-rig count dropped by 75 percent to about 250 rigs over the pandemic months. Now that prices have recovered, companies are finding it difficult to hire workers to come back to substantially increase the rig count and meet the rebounding demand. Like other parts of the economy, they need truck drivers too as pipeline transport has been substantially curbed.
Staples adds, “The administration calling on foreign countries to increase production a few months ago, rather than encouraging local jobs and local investment, had a chilling effect on expansion. This tragic event should help reset American priorities and recognize that American oil and natural gas are produced in more environmentally responsible ways than in any other country in the world. Our companies have strong commitments to address concerns about our climate, while providing the oil and natural gas that fuels modern life and keeps nations secure.”
A study by the Manhattan Institute concluded transportation of oil and gas by pipelines results in fewer spillage incidents and injuries than road and rail, and noted, “Americans are more likely to get struck by lightning than to be killed in a pipeline accident.”
As recently as 2018, 70 percent of U.S. crude was transported by pipeline. The safety of energy transport, in terms of human death and property destruction—from best to worst: boats, pipelines, trains, then trucks1 .
A typical tank trailer holds about 9,000 gallons or 200 barrels, a little under one-third of a rail car. Shipping by truck instead of the Keystone XL requires another 1.5 million tanker trucks. Trucking is the most risky form of transport from an accident and spill standpoint.
Pipeline transport of crude cost about $5 per barrel, rail costs $10-15, and trucking is higher due to additional labor requirements.
IN THE REAL WORLD
ENERGY CASE STUDIES
Few places feel the pressure of energy inflation more than the Port of Corpus Christi, which exports crude and natural gas around the world and is generally known as energy port of the Americas. Thomas Graham, founder of Crosswind Media & Public Relations, is a native of Corpus Christi and represents Fortune 500 clients in the region; Graham says, “Many of my clients have been impacted by the dynamic economic conditions we are facing.”
Graham agrees with Todd Staples as they both watch the port fill the void that the White House administration seems to believe Russia should fill. He adds, “Putin has chosen to weaponize his nation’s energy production and everything from gas companies to real estate developers are looking at the parallel rise in energy and housing, plus higher interest rates, which is a double-edged sword for corporations and consumers alike.” As Russia becomes a primary source, the United States and Europe are beginning to wake up to the fact that energy independence is a critical strategy asset for democracy in general and business specifically.
He adds, “The previous administration, Secretary Perry and Governor Abbott included, recognized the need for independence. The main stream media ridiculed the party and the President when we were a global exporter of natural gas, and ensured we were free from the tyranny of Putin. As he attempts to march across Ukraine, I hope the average voter remembers the consequences caused by shutting down pipelines and forcing the U.S. and other nations to rely on what Senator Cruz calls the ‘Russian gas pump.’ When we are told to just get over it because it is Putin’s price hike, that does not speak to the real and valid concerns of business owners who have to help employees make ends meet. It is that type of Beltway [talk] that causes business owners to lose trust in the government.“
Currently, Graham says his Corpus Christi energy clients are diverting their shipments elsewhere and Crosswind is helping tell the national story about production. “Locally,” he says, “people we work with in real estate or marketing are concerned because the rising costs of living will slow the energy market further. At the end of the day, the work we do is for the communities we serve. When a gallon of gas jumps from $2.79 to $3.99 and it costs 30 percent more to feed a family because the food supply chain is paying those same increases, the number of employees living paycheck to paycheck increases—it is harmful across the board.”
EXPERT ADVICE
As an apex marketer, Graham recommends more empathy for customers and team members and the challenges they face in business and daily life. “We need to recognize that, as a nation, the pandemic is a unique experience and a lot of people are hurting.”
Make sure your strategy is directly tied to your core business offerings.
“There are many things a business does to bring it extra money but make sure everything you are doing plays to your strengths, is profitable, and there are good people doing the work. Following that, shepherd your resources, reinvest in your organization, and take care of your people.”
Thomas Graham is the founder of Crosswind Media & Public Relations in Austin. For more than 20 years he has helped business leaders energize their brands and achieve business objectives through effective media and corporate communications strategies. He is an accomplished brand architect, crisis-tested media spokesperson and an expert in shaping public opinion and managing complex communications programs. (photo courtesy Thomas Graham)
IMPACTS OF INFLATION HEADWINDS FOR HOMEBUILDERS
SCARCITY MATTERS
With supply shortages and rising material costs impacting quality of life all over the world, businesses and consumers alike continue to feel the effects of an ongoing inflation crisis.
For Nick McIntyre, vice president of land development with Perry Homes, inflation is a constant challenge when it comes to delivering a client experience that meets the company’s vision and timeline. “We have to offer options we didn’t before and provide alternatives to the options people selected but are no longer available,” he says. “It makes it difficult to promise, when a person wants to buy a home, that what he or she wants will be available at the end. We try and get clients what they want, but at the end of the day it may not be available.”
by Charlotte Kovalchuk and Ann Marie Kennon
Fluctuations in the commodities market have made it difficult to project home prices a year in advance—Nick’s usual business plan timeline. “At this point in this market, we’ve nearly completely transitioned to evaluating our business month to month,’ he says.
PRICE INCREASES
For developer Mark Allen of Jarrell Development Group and Cardinal Farms, shortages and price increases for windows, lumber, and fuel have inhibited his ability to serve home buyers. Like many who rely on suppliers, he has had to order windows three months in advance. He also has to consider the cost of diesel, for which $6.00 per gallon and more is beginning to creep eastward from California. Even before Russia invaded Ukraine, the fuel that runs the global economy was in short
supply. Some analysts say even if oil and gas prices decline, diesel fuel will encounter spot shortages due to refinery slowdowns.
Allen’s business partner, Ron Heine, has faced the same challenge of rising material costs affecting home prices. “You may see a 2 or 3 percent increase over the course of a whole job, but every month it seems like we’re adjusting the price 3 percent. Your buyer wants a fixed price, but with the prices changing so radically all the time, it’s hard to do a fixed price home any more,” he says.
Fewer homes coming into the market has only compounded the cost increases. “Lack of inventory is the biggest thing that drives it up. Demand is still through the roof. If we had a finished lot today, we could sell everything we had tomorrow,” McIntyre says. But that demand shows just how desirable Central Texas is for prospective residents, Allen says. While Texas is not immune to the impact of recession, he expects the state to weather that storm. “Even eight or nine years ago when
Obama was saying we had the worst economy since the Great Depression, and it was bad, but Central Texas didn’t go through what most of the country went through. We’re blessed to be in Williamson County.”
THE PRIORITY OF LABOR
IMPACTS OF INFLATION
LABOR SHORTAGES
On top of market fluctuations, the labor shortage is challenging the home building process, partly because construction workers are in short supply and asking for higher pay, McIntyre says. “Some of our employees are real quality guys who will ask for an increase. We try to accommodate the men we know and really want to keep. We also add bonus incentives to finish in a timely fashion. We want to keep the folks we see doing a good job and maintaining quality.”
Heine adds, “There is a labor shortage in the construction industry, but not a shortage of people. I believe there are enough people, but we have to entice them into doing those jobs, which has driven the [home] price up.” Another challenge has been finding qualified workers or providing training in a time frame that ensures homes are built in a timely manner. “People getting trained and learning new skills—all that takes time, but the amount of work keeps increasing,” he says.
Labor shortages are not limited to construction and development. Georgetown Mayor Josh Schroeder says inflation is affecting most businesses in the city that rely on a workforce. “Inflation touches a business in many places. For instance, for a bar, you have to consider the rising value of the land, and labor costs, then add materials, supply, and equipment. Simply put, when the rent goes up, the price of beer goes up,” he says. “Bars and everyone else, from restaurants to engineers, say the pinch point is labor. Materials are a problem, but businesses are struggling to find labor even if they are willing to pay.”
MUNICIPAL MATTERS
Mayor Schroeder added, “We know retail issues will be worked out as the supply chain slowly returns to normal, and developers will always find land to build on. Our biggest challenge—human capital—cannot be created out of thin air. We have great jobs, we just need people to fill them.” The mayor explains the city has been trying to hire engineers and other management professionals, but every engineering company in Texas is looking for engineers right now. He notes Georgetown and many other Williamson County cities are in hyper growth mode engineering jobs are in highest demand.
THE PROBLEM
As businesses return to pre-COVID operations, and unemployment checks are no longer coming, the issue is not that people do not want to work. The mayor said, “All our businesses are growing and each simply needs more people than they did two years ago to keep up with customer and consumer demand. You can’t make products if you don’t have the people to unload the trucks and assemble the products. You can ask everyone from Mesquite Creek Outfitters to Steger Bizzell Engineering—even the city of Georgetown—we talk daily about how to recruit and take care of people. At the very least, we have to consider retention.”
Mayor Schroeder says he talks about it daily with other mayors and Georgetown followed the County’s lead and gave the ISD employees a mid-year raise of 3 percent. “We’ve lost too many employees to the private sector. If we need five engineers, we have to hire seven because two others are being recruited at twice the salary.” What this means for businesses who work with the city is to exercise patience when submitting applications or waiting for work to get done because there are fewer staff to push through the paperwork. “Sadly,” the mayor adds, “private companies pay these higher salaries, which means they raise their billing rates to clients, which is passed to developers. This, plus gas and groceries going up, means everyone is making more money, but it also costs everyone more to buy.”
by Ann Marie Kennon
THE GREAT RETIREMENT
There’s no doubt the pandemic put a strain on supply chains and then President Biden came in and layered massive government spending on top that. As a result, the country is dealing with runaway inflation. It’s costing more to go grocery shopping, fill up your car with gas, just basic necessities. Americans are struggling because their wages are down, but their expenses are much higher than they were just a year or two ago.
Congressman John Carter Texas District 31 When it comes to inflation, Williamson County is no different than any city or the state itself, according to County Judge Bill Gravell, Jr. “If you’re pleased with the price of gas, a gallon of milk, and what meat costs in the store, then clearly you are pleased with who is in the White House.” While the average resident and consumer have no control over inflation, county leadership took the reins and voted for the first-ever mid-year salary increase for employees to help manage the challenges of inflation.
Judge Gravell added, “Unfortunately we are dealing locally with decisions being made in Washington D.C. and we are competing with private companies and agencies able to give raises any time, or recruit at higher salaries.” Williamson County Human Resources reported in February that the county had 200 vacancies, a reduction from the previous quarter at 240.
The judge said inflation is to blame because although government and municipal jobs mean good benefits and retirement plans, the salaries are generally lower than similar positions in the private sector. “When we have people leaving their jobs as window clerks because they make more at a fast food restaurant, that is a problem, and it goes all the way up to our highest paid engineers. Our cities and counties simply can’t compete, particularly when engineering companies are even poaching from each other. Inflationary seasons are a great time to tell someone ‘You’re really good at your job, why not leave this $100,000 job and work for us at $150,000?’ “
GETTING OUT
Judge Gravell echoed what Georgetown Mayor Josh Schroeder explained; (previous page) the dearth of quality employees is no longer about people staying home and collecting unemployment. “Many have referenced the ‘great resignation’ but we need to be cognizant of the great retirement. I know of one elected official who is 62 and able to retire this year. His pension will be half his annual salary but he can fill the same role, provisionally, five to eight days a month and still take care of his family. He looked at his quality of life, and the fact that things may not get any better in his next four years, and decided he did not have to deal with it any more. We are seeing the same thing in EMS and law enforcement. He is just one example of more than 100 county employees who will retire this year. My fear is that we are losing the wisdom and institutional knowledge in the workplace.”
Until the pandemic, the average age at which Americans chose to retire had been rising for 30 years. But, two-thirds of those leaving their jobs in the summer of 2021 were retiring. One million were ‘normal’ retirements, an additional 1.5 million opted for early retirement. Today, nearly half of Americans expect to retire before they turn 62, and many are planning to do so by age 55.
While the increase in high-level jobs is a boon to the next generation of upwardly mobile workers and, as Judge Gravell stated, the new paradigm of senior hiring may be more important as knowledge workers become more scarce in the workplace.
AGRICULTURE INPUT COSTS
ARE HURTING BUSINESS AND THE MIDDLE CLASS
Unlike a software or manufacturing company that can create new product paradigms and pricing to maintain profit under inflationary conditions, the agriculture industry’s primary model has and will always be growing and selling food. The same challenges exist for those growing renewable energy products; even as one governor supports bio-fuels, another green policy governor is favoring electric vehicles. In every case, supply chain issues, rising prices for fertilizer and other farm inputs, plus inflation anywhere over 7 percent, means many farmers must borrow money at inflated rates until crops or meat are ready for market, or plan for smaller yields based on future costs.
PRICE AND PAIN POINTS
In July 2020, urea fertilizer was $200 per ton. By February 2022, it was more than $600 a ton, according to data collected by The Fertilizer Institute. Cattleman Jim Schwertner affirms, “We get a lot of our fertilizer from Russia,” he says, “Those prices were already getting higher before the war because the International Trade Commission put duties on phosphorus imports from Russia. Corn has also doubled in price, so it costs a lot more to feed cattle, hogs, and poultry.
“Consumer beef prices, specifically, are up 20 percent because the supply chain has been interrupted in multiple places. What many people don’t realize is that those ‘interruptions’ are revenue pits between the consumer and the rancher, who is not determining the price of his fertilizer, feed, or products, or putting more profit in his pocket. Sadly, the same is true for businesses in nearly every industry.”
“Beyond that,” he adds, “the president hurt us when he shut down the Keystone pipeline and began purchasing energy from other countries; which pushed energy prices higher. Our government does not realize the extent to which farmers and ranchers protect the environment, so the aversion to pipelines—to the detriment of agriculture—is ironic.”
In agriculture in particular, higher energy prices affect the middle class because nearly everything is transported by truck or rail and farmers and ranchers have to pay twice. They cannot control the cost of fuel or corn and must pass it on to the consumer. Schwertner says, “Farmers pay retail to acquire resources, sell products at wholesale, then pay again to ship their products. The only way to correct this is to get energy costs down.”
He concedes that consumers are suffering because all food products are up by at least 30 percent but everyone must eat. “People can always substitute cheaper sources of protein; chicken or fish, and then go to beans and cheese, but all food products are becoming more expensive and there is no way for farmers to mitigate the effects. When crops or animals are ready for harvest or slaughter, they have to go, and the consumer will have to pay for it until we can get the costs corrected.”
photo by Morgan Anderson Photography, courtesy of Jim Schwertner
IT’S ABOUT PUBLIC POLICY
While Schwertner and others continue to care for our food sources, he believes it is not right, in the 21st century, that Americans can not afford food. “The most positive thing we can do is elect fiscally conservative leaders who will stop the stimulus, affect our energy independence and worry more about feeding our families than about the environment. We have more energy in North America than all other countries combined. There is no shortage of energy, we just need to do it right.”
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