Has inflation broken out at last? Certainly not at the consumer level, but more and more firms seem to be passing on price increases to their business customers.
Trucking was ahead of the curve on this development. Many carriers have been passing through fuel increases for a year, although fuel surcharges don't necessarily allow recapture of fuel spent idling or deadheading. The overall producer price index (PPI) rose 4.2% from January 2004 to January 2005, according to the Bureau of Labor Statistics. Meanwhile, PPIs for general freight trucking rose 8.6% for local service, 7.7% for long-distance LTL service, and 4.9% for longhaul truckload service.
Rate increases, including fuel surcharges, succeeded in 2004 because trucking capacity was tight, as many fleets shrank or disappeared in the three preceding lean years. In addition, business was picking up for many customers, making them more willing to pay for assured deliveries rather than keep shopping for lower freight rates. Third, the large productivity gains many businesses have achieved allowed them to absorb some minor cost increases, like freight rates.
What is changing now? First, a much wider range of materials than fuel are rising in cost. Steel mill products jumped 46% in price in the 12 months through January. An alphabet-full of industrial metals, from aluminum to zinc, has similarly shot up.
In many cases, the ores and scrap metals that provide raw material for making the finished products have risen even more. These increases make it likely that the mills will push finished-metals prices higher again in the coming months, affecting the cost of engines, chassis, wiring, trailers, and a host of other products.
In the year ending in January, the producer price index for heavy trucks rose just 2.7% but the index for trailers rose 8.5%, reflecting the higher percentage of metal as a share of the cost of trailers.
Second, fuel in its many forms is rising still more. The Energy Information Administration reported on March 7 that the national average retail price for on-highway diesel fuel was $2.16/gal., which was one-third higher than a year before. Natural gas prices also rose to uncommonly high levels for the tail end of the heating season. As a result, a variety of industries that use oil or gas for power, transportation fuel or feedstock have higher costs.
Third, imports are no longer a sure source of lower prices. The U.S. dollar has dropped relative to the Canadian dollar, euro, pound, yen, and other currencies, though not the Chinese yuan. But even products from China face higher raw materials and ocean shipping costs. Clogged ports and rail yards make delivery times for imports less reliable, forcing importers to stock more, turn to backup sources, or risk losing sales.
Fourth, health-care costs continue their relentless rise. The latest “Beige Book” survey of current business conditions found employers in all types of industries and regions worrying about this cost.
Businesses have coped by holding down wage increases and pushing more health-care costs onto employees, retirees, and their families. But the March Beige Book survey also found more employers than before were encountering tight labor markets and, in a few cases, higher wages.
The bottom line: The plethora of price increases makes this a good time to lock in prices, not only for diesel fuel, but also for products with high metal and/or petroleum content, like tractors, trailers, tires and motor oil. Some products may have price reversals. But the weight of evidence has shifted toward an expectation of higher prices ahead.