Talking Points: Should processors worry about worsening inflation?

A little optimism at the beginning of a new year is normal.

Processors and equipment manufacturers today face plenty of headwinds, but a full 60 percent of respondents to our annual buying survey said their business will be better in 2022 and another 35 percent believe it will be at least as good as it was in 2021. story, which includes interviews with more than 20 industry leaders, can be found here.

I’ve seen it over and over — plastics processors complain about their day-to-day problems but will admit their long-term business outlook is good. Perhaps that is a sign of the quality of leadership in companies where overcoming problems is routine.

There is one issue that we need to pay close attention to — inflation. By the end of 2022 it could have a significant impact on the overall economy and the plastics industry.

Inflation is the loss of purchasing power over time. We normally think of inflation as higher prices for everyday goods and services, such as food, clothing and fuel. Rising consumer demand is often the culprit, but we have seen in the past 18 months that limited oil production and supply chain problems can also cause inflation.

Economists are mixed as to whether the current U.S. inflation will be permanent or will fade. The Federal Reserve, as well as the European Central Bank and Bank of England, in late December announced plans to address inflation. That’s a good thing, but probably won’t result in a rapid turnaround.

How much should inflation worry processors? Perc Pineda, chief economist for the Plastics Industry Association (PLASTICS), said they definitely should be concerned.

“Inflation reflects the changes in prices of goods and services in the economy,” Pineda wrote in an email. “Plastics and plastics products are widely used in goods and services. In fact, in 2020, 83.5 percent of plastics products ended up in the household sector’s personal consumption expenditures. Any significant changes in prices in goods and services have implications on the bottom line of processors.

“It is also important to consider that employees are now facing an erosion of their purchasing power because of inflation. Wages would need to go up at least equal to the rate of inflation and that means processors’ cost of employment is higher,” Pineda said.

Companies are already paying higher costs for labor, resin and transportation. What else could happen?

“What industries are looking for are credible market signals that inflation is moderating. So, until we see significant adjustments in the supply side of our economy — labor, materials, ancillary services such as trucking — prices could continue to remain high relative to pre-pandemic,” he said.

“The challenge is the different paces by which industries and countries are emerging from the pandemic. If we can get reopening of the economy safely a policy priority of the federal and state governments, that could be a credible market signal to get the supply side of the economy going.”

If consumer prices continue to rise and consumers stop spending, what does it mean for processors?  

“To put it in perspective, the U.S. started seeing headline inflation above 2 percent this March and the year-over-year change in the Consumer Price Index (CPI) was 2.6 percent,” Pineda said. “It was expected that production of goods and services would increase at a similar rate. But that didn’t happen for reasons related to the pandemic. So, prices couldn’t adjust downward — instead continued rising to 6.9 percent in November — as demand remained strong.

“Despite higher prices, consumption remains strong, thus it’s important to consider price elasticities or price sensitivities. There are goods and services that are less sensitive to price changes — meaning demand is not going to change as much as the change in price,” Pineda said.

“Consumption of some goods can be postponed, but there are those that cannot. So, depending on the end-market processors serve — the impact will vary across the industry. Moreover, the impact on processors also depends on their contractual obligations. In theory, annual order contracts give processors the opportunity to adjust prices when they are renewed. If you are using cost-plus pricing, you need to account for the changes in your costs and markup.”

Some companies will disappear in 2022, but Pineda said inflation would not likely be a primary cause.

“The reality is some companies enjoy a higher degree of market power than others or some companies are price makers and others are price seekers,” Pineda said. “It is expected that unprofitable companies will exit the industry — or better yet be acquired by other companies. However, to say that’s due primarily to inflationary pressures is probably inaccurate — there could be other factors.”

Ron Shinn, editor

[email protected]