Anticipating Pricing Pressures: How Will Inflation Affect Your Production Costs?

Commodity prices have soared in recent years. Unfortunately, these higher and often-volatile commodity prices have placed pressure on finished product and service prices and made market intelligence that much more critical to cost mitigation and the bottom line.

Have you ever wondered what risks commodity prices pose directly to your costs? Common sources of pressure have included:

• Steel prices spiking by $234/ton in the second quarter of 2004
• Crude oil prices rising by more than $30/barrel in the first half of 2008
• Copper prices topping $9,000/metric ton in the first quarter of 2011

Prices are influenced by a number of dynamic forces, including the economy, industry trends, demand, and availability. Input costs are usually the primary driver of price escalation, particularly for more downstream products.

This means that the best way to anticipate what you will pay tomorrow is to track your supplier’s costs today. This is a simple yet powerful concept that most business professionals already encounter on a regular basis. Precisely how raw material or “upstream” prices influence “downstream” costs, on the other hand, is a more difficult question.

Here are some rules of thumb that can help you anticipate how and when your costs will change.