SMART BUYER COMMUNITY™
Last week I had a conversation with an Aluminum & Glass Manufacturer about the recent raw material prices.
“It was crazily increasing isn’t it lately, how is your business?” I asked.
“Yeah and previously I had given my quotations validity for about a quarter. But now, it is only a week because the prices adjusts higher and higher as a week passes by!” The manufacturer says.
Then I followed up with another question.
“Will the prices drop back to normal, when the market returns to normal?”
He immediately answered without hesitant:
“Nope it would not.”
That is one angle to explain the ever increasing cost of building houses — which partly explains how the game of inflation on the overall market works. In lay man terms, every commodity, raw materials and energy costs are somewhat interrelated, as exploration of new energy (for example, oil) will require raw materials like steel (machineries) and vice versa. Hence, inflation which termed as the pricing raise in the basket of goods & services is because of the interrelation of the pricing chain.
Back to the raw material prices, particularly the building materials.
Logically speaking, with supplies of many raw materials becoming harder to secure, commodity price volatility may not be just a temporary phenomenon, and it is up to manufacturers to either absorb additional costs, find new ways to mitigate the expenses, or pass price increases along to customers who are already reluctant to spend. But is that really the case?
Well, lookin from an initial supply shortage which caused the price increase, and at the same time knowing that the prices wont adjust back to it’s previous prices before the shortage is an interesting perspective to learn to better know what economic situation that we are in.
Understanding that sometimes, inflation also has psychological factor to it as we refer to the manufacturer’s answer of “Nope, it wont drop back to normal” assumption.
When I study further into it, the prices were set and raised based on an assumption of all businesses think that other businesses are and will do the same. In other words, if they expect higher inflation, they will act in a way that makes higher inflation more likely, more so if it is to their favor!
Hence the pattern goes like:
Shortage of Supply -> Price Increase ->Supply Stabilize -> Price Increase Remained
On the other hand, if we look at the statistics and inflation rate well onwards from 2017, it has been on the decline and historic low. Though the forecasts expect a 2% positive inflation over the next few years — it does seem likely when we see the prices of raw materials are fluctuating as what we see now.
The Covid-19 numbers are alarming as of writing the article (2/8/2021), which economy recovery and normal spending wont be coming back so soon, which is a key influential factor in inflation.
In other words, the formula of inflation is not as simple and straightforward. There are supply factors (costs of production, raw materials & production capacity etc.) and demand factors (Demand of product and services, Market spending, Labour force & Unemployment rate etc.) that affects one another.
Earlier we have mentioned about surging price of raw materials — which is a cost pushed inflation (from Supply perspective). On the flip side, the pandemic situation has halted spending and caused a lot of job lost (from Demand perspective).
What will be the most crucial/ outweighing factor affecting the inflation rates of Malaysia over the next few years? It is important to understand this and be prepared for what is coming.
If hyper inflation is coming back and history ever repeats, that will be a boon to corporate bottom lines and investors as well. Because rising material costs usually foreshadow fatter profit margins, according to Jonathan Golub, chief U.S. equity strategist at Credit Suisse Group.
This is why I see that psychological factor is a huge decisive element in deciding where the direction of inflation is heading too, and it is clearly not just merely decided by economic factors.
In conclusion, speaking from the perspective of the raw materials’ price surge, it will directly affect inflation from its price increase given that the prices sustains at it’s high level, and indirectly causing inflation due to psychological factors of business having the “incentives” of having the prices higher. Clearly, on top of supply and demand factors, the psychological incentives would play a big role in the Malaysian economy.