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Are Things Getting More Expensive? How Much More?
As business owners, we're all aware of cost increases. In order to price our product or service, we need to project our costs. If costs go up unexpectedly, our profit will decline. Business owners I know use many tools to educate themselves on the general state of the economy, conditions in their industry and the local economy. One piece of information is the Consumer Price Index (CPI), which measures inflation. We hear about CPI through the media, but the measurement can be deceiving.
I tend to remember good definitions. Someone defined inflation as the "general increase in prices over time". Think about a basket of goods at the grocery store. Most of us buy the same type of goods each time we go to the store: milk, bread, lettuce, meat, etc. Imagine pricing that same basket of goods each month and measuring the price change of the items in the basket- that's inflation.
Not all inflation measures are the same, however. "Core inflation excludes the cost of food and energy goods, the very items that are the most visible prices for most consumers." Why? "The theory is that food and energy prices historically have been subject to wild swings". Some argue that "ignoring these two categories could be understating the inflationary threat". Some measurements include food and energy but exclude items such as airline tickets, televisions and clothing, which can also fluctuate a great deal.
The Lesson: When researching price and cost information, consider how the data is being compiled.
Your Homework: Do you have costs that are changing faster than the overall economy? Is it due to shortages, high demand? Understanding why these costs are changing can help an owner plan more effectively.
(Reference: "Food, energy costs' exclusion debated", USA Today, 6/14/07)

Learn more about this author, Ken Boyd.
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