Inflation is a topic currently dominating the headlines, and that’s not likely to change anytime soon. Inflation affects manufacturing in numerous ways, some of which are obvious and expected, and, others, people may not immediately realize. However, people can and should prepare for the effects of industrial inflation to mitigate the outcomes. Here are some specific links between manufacturing and inflation.
Inflation Affects Manufacturing by Causing Higher Consumer Costs
Industrial inflation means manufacturers face higher costs for a variety of necessities, from packaging to raw materials. One of the most common ways they cope is by passing the additional expenses on to customers.
Many manufacturers notice ripple effects when inflation affects manufacturing, too. People in the food and beverage industry have discussed how their sector is dealing with a perfect storm of numerous difficulties. Previously, the higher costs typically came from one part of the supply chain. But, now, they’re associated with various factors all at once.
In addition to dealing with things like rising freight costs, manufacturers experience increased expenses for aspects further down the supply chain, such as higher costs for the grain needed to feed the animals that get used for food. Then, consumers notice that meat is more expensive.
Coca-Cola, Nestlé, General Mills, and Unilever are some of the food manufacturing giants that have recently raised their prices. In the automotive sector, new car prices are 12.6% higher than a year ago. Similarly, when people need their automobiles repaired, it’s more expensive, often because manufacturers and dealers are having more trouble sourcing parts than usual.
Additionally, research on more than 3,600 firms operating in the U.S. showed that markups and profits during 2021 were at their highest levels since the 1950s. That suggests manufacturers are continuing to profit despite inflation, but primarily because they’re driving up prices at consumers’ expense.
Rather than raising prices without warning, manufacturers should consider publishing content on their websites that explains the effect of industrial inflation on their operations and apologizes for the change.
Executives Granting Pay Rises to Help Workers Cope With Industrial Inflation
People following manufacturing and inflation trends may understandably hope that the worst will be over soon. However, a survey of executives showed most don’t think that’s likely. The results showed that 69% of respondents believe inflation will remain elevated at the end of 2022.
The same survey indicated that 88% of those polled view hiring and talent retention as critical to companies’ prospects in 2022. Many manufacturers are already experiencing labor shortages. Some may need to raise their salaries to keep their current workforces and attract new candidates.
Research published elsewhere showed that 64% of U.S. employers had budgeted for higher employee pay increases than they provided last year. Relatedly, 41% had increased their worker pay budgets since making original projections earlier in 2022.
The study showed that 73% of people cited the tight labor market as their primary reason for increasing employee salaries. However, 46% did so because they said inflation caused employees to expect higher payments. The assumption is, then, that employers made proactive decisions to boost earnings before the workers became so discouraged that they quit in favor of other opportunities.
The risk of workers going on strike is a real concern, too. At the time of this writing, there had been more than 300 labor action events in the U.S. so far this year. Many occurred because the people involved felt they weren’t earning enough. The problem extends to other parts of the world, too. In August 2022, oil refinery workers in Scotland blocked the facility’s entrance for several hours, preventing tankers from entering or leaving.
Manufacturers Among the First to Feel Inflation’s Effects
Evidence suggests manufacturers will experience inflation’s effects earlier and deal with them longer than other sectors. One of the potential reasons for that is that producers’ struggles, whether to fill open positions or control costs, could elevate the existing trade deficit.
Challenges in manufacturing and inflation could also prevent producers from investing in certain pieces of equipment, even if they know doing so would make their businesses more resilient in the long run. Statistics show original equipment suppliers’ prices are up an average of 17% over 2021 prices. That increase could mean manufacturers hold off on equipment they intended to buy to increase competitiveness.
Similarly, when a manufacturer is under intense and long-term pressure from inflation, they may delay essential upkeep on their existing machines.
If manufacturers cannot afford to buy new equipment, the next best thing may be to invest in technology that improves the visibility of the machines they have. Using sensors and predictive analytics is one way to do that. Algorithms can spot unusual operating behavior before it causes unplanned shutdowns. Then, manufacturers can be more proactive, which is especially valuable when costs are rising.
Some manufacturers may be among those who have not come under extra pressure due to inflation yet. In such cases, now is the best time to plan for what the future may likely bring. That may mean working with suppliers to secure bulk pricing discounts, reassessing the supply chain to identify its strengths and weaknesses, and finding which investments will provide the best returns over the short and long term.
Manufacturers May Need to Change Their Packaging
Although some manufacturers deal with industrial inflation by charging customers more for the same items, that’s not the only option.
Another possibility is to deal with how inflation affects manufacturing in a less obvious way that still makes consumers lose out. In short, producers charge customers the same amounts for smaller-sized products. However, there are also cases where the packages are smaller and the prices are higher. No matter what, manufacturers may opt to change their packaging.
Family-sized boxes of Wheat Thins now have 28 fewer crackers and bags of Doritos include five fewer chips. Those are both examples of products that get sold at the same prices but inside smaller packages.
Gatorade bottles are now 4 ounces smaller than their previous packages, but people pay the same price. However, a representative clarified that the bottles did not change because of a cost-cutting measure from the brand. Instead, Gatorade opted for a more aerodynamic design that was easier for people to hold. Cost concerns don’t drive all packaging changes, but in this economy, they understandably might be a significant factor.
The president of one packaging company that serves most Fortune 100 companies said that 81% of clients changed product packages this year. As company leaders keep an eye on manufacturing and inflation, many realize that package-related changes could also help them manage supply chain difficulties.
Aspects as seemingly minor as the color of internal packaging or the length of flaps could change overall packaging costs. Luckily, many of these alterations don’t have major effects on customer perceptions. Even so, they require manufacturers to think carefully about how they can mitigate industrial inflation with packaging, which may include asking providers for input.
Manufacturing and Inflation Are Closely Linked
People cannot have in-depth discussions about the current economy without bringing up how inflation affects manufacturing. No one can say for sure how long the inflationary conditions will last and how much worse they could get.
However, manufacturers will be in the best position to fight industrial inflation if they allow themselves to think outside the box and become willing to explore new options. They should also prepare for inflation to be a long-term issue and consider that when deciding how to proceed.
Doing these things won’t prevent manufacturers from experiencing at least some inflation-related issues. However, being more flexible during these challenging times should pay off.