Insights for Tube, Pipe, and Profile Manufacturers – Issue 1

Inflation in the News

Inflation is in the headlines daily and it’s weighing heavily on nearly everyone’s mind. It usually chugs along quietly in the background, around 1 or 2 percent per year. When it gets out of hand, the federal government pushes up interest rates and borrowing costs more. Consumers and businesses tend to back off on big-ticket purchases, especially anything that requires a loan, like a mortgage. Demand eases, the economy cools, and inflation subsides.

The following chart shows the last few years of inflation in the form of the consumer price index for urban consumers (annual rates). It also shows the discount rate, a benchmark interest rate. When calculating inflation, economists usually strip out food and energy, which are volatile, to derive core inflation. The inflation over the last year or so is a more broad-based, all-encompassing increase in prices, and because fuel prices are so high, it makes sense to keep energy in the mix.

More About Inflation

Inflation goes well beyond consumers, of course. It affects businesses, too, and some more than others. Some much more than others. Businesses that use a lot of steel have been particularly hard-hit, and not just since the pandemic. This goes back years.

The price of steel can double or halve in six months—nothing new there—but the overall trend, over the last several decades, is that the cost of steel has increased faster than the prices of many other industrial commodities. The Bureau of Labor Statistics tracks commodity prices back about 40 years, including a price index for all manufacturers (1984) and one for tube and pipe producers (1982). Compared to the benchmark year, the input costs for all of manufacturing have increased 250 percent; for tube and pipe producers, they have increased 615 percent.

Dealing with Inflation

What happens when the federal government tries to tamp down inflation? The result usually isn’t good. Economic forces are hard to balance and plateaus are rare; an economy is usually growing or shrinking. Attempts to reduce inflation tend to cause the economy to regress and more than a few people end up unemployed.

Interest rates, the unemployment rate, and swings in economic activity tend to run in a tight and predictable sequence. It’s worth noting that the economic slowdown that follows a rise in unemployment comes from two sources. First, those who find themselves unemployed cut back on discretionary spending. Second, any who are still employed but in fear of a period of unemployment likewise tend to cut back on spending, making a bad situation worse.

Will the Inflation Cycle Play Out Differently This Time?

Inflation usually is a simmering problem, but this time around, it came on suddenly. As the pandemic’s grip tightened, central banks took action, pumping liquidity into the world’s economies, setting the stage for a bout of inflation. At the same time, upheavals in supply chains led to higher prices for nearly every industrial commodity. Also, the war in Ukraine might drag on for some time, keeping prices for some crops and petroleum artificially high for the foreseeable future. This doesn’t bode well, especially because persistently high petroleum prices drive up the prices of all other goods, given its role in transportation.

That said, the inflation cycle is a little unusual this time. From 2001 until 2020 (pre-pandemic times), the number of job openings at any given time averaged 4.5 million. These days it’s 11.4 million. Some of this is driven by the pandemic; some of it is the outcome of the Retirement Boom.

How will this help if unemployment rises? Over the last 40 years, the annualized number of the unemployed has been as low as 5.6 million and as high as 14.8 million. So if businesses are forced to shed workers this time around, those individuals will have 2.5 times as many job opportunities as did workers over the last 20 years. This might help to moderate the cycle.

Recession? No recession? Mild recession?

It’s called a business cycle for a reason. The long periods of growth—which have averaged 74 months over the last 50 years, according to the NBER—are punctuated by periods of retrenchment, which usually last about a year, according to the same source. Economic drivers change over time, so no two periods of expansion and contraction are identical.

Wild cards this time around include snarls in supply chains, including a shortage of truck drivers; the war in Ukraine; and inflation, especially as it concerns fuel prices. That said, a few things are likely to moderate the downside of the business cycle. Our economy is a little torn and frayed from the pandemic, but we’ve learned a few more lessons in dealing with challenging times; the increase in interest rates didn’t come as much of a surprise; and the number of job openings is extremely high.