As a buyer, one of your biggest concerns is the return of inflation. Back in the early 80’s most multi-year contracts entered into included escalation provisions. Prices were adjusted monthly or quarterly based upon a formula. The typical formula was based on data from the Bureau of Labor Statistics.
With unemployment in the USA just below 5%, economists predicted that both interest rates and inflation would return. Other than rent for housing, there hasn’t been much inflation in the USA. Interest rates were projected to increase by the Fed but have recently stalled.
I read a good article titled Where Have All the Good Jobs Gone? According to the author, the loss of high quality manufacturing jobs appears to be a key factor. While jobs are being created about 70 to 80% were low paying jobs in the retail and food service sectors. Historically these jobs pay about 17% less total compensation than a manufacturing job.
In general, retail and food service sectors like to hire their employees on a part time basis. While a manufacturer has a desire to reap the benefits of training and skills of their employees on a full time basis. This is another contributing factor driving low unemployment with low quality jobs.
So the real question is when will inflation return? Do we have to wait for a return of manufacturing jobs before we need to change how contracts are managed? This will be the topic in an upcoming post.