Today, inflation is one of the most pressing challenges following COVID-19. Households and businesses nationwide are struggling to navigate lower incomes, higher expenses, and tighter budgets. For the construction industry, these higher costs caused by inflation can be catastrophic.
The past three years have brought unprecedented disaster after disaster, creating a never-before-seen climate of economic turmoil that is predicted to get worse.
- COVID-19’s several periods of quarantine and strict government sanctions came with drastic rises and falls in supply and demand.
- The war between Russia and Ukraine further strained supply chains during a time of high demand, affecting inflation.
- The ongoing housing crisis has created an expensive housing market, embedding these inflated prices into our economy and affecting the cost of everything else.
And while every American citizen can feel the harsh grasp of inflation, the construction industry is particularly vulnerable, as they are at the forefront; directly tasked with combating the dwindling supply chain while building the foundation of our country.
Is Inflation Good or Bad?
Inflation itself typically has a negative connotation as it strains everyone’s pockets and creates less buying power. However, is it actually good or bad? The answer would be neither; inflation occurs naturally and is a side-effect of a healthy economy. Though rising inflation paired with stagnant salaries creates financial strain for a lot of businesses and households.
Different kinds of Inflation
There are two common causes of inflation:
- Cost-Push inflation: Where the increased cost of wages and materials drive up overall prices.
- Demand-Pull inflation: Where a decreased supply drives up overall prices.
Today we are seeing both of these causes combined. There is both an increased cost of wages and materials as well as decreased material supply. This is creating a heavily inflated economy and severe supply-chain bottlenecks.
How does inflation impact distributors?
Inflation this high is very problematic for distribution businesses. Supply chain partners are feeling the elevated costs and raising their prices, in turn passing the burden of inflation onto distributors. These higher costs and lower profits put businesses under financial strain and distributors are forced to either absorb costs or raise prices, potentially resulting in lost customers.
Skilled laborers are in many cases not seeing their wages being raised to reflect inflation, putting them under financial pressure. Should workers demand higher wages they put pressure back on the business owner. All of these factors combined make construction projects more expensive to complete and the overall demand for materials goes down.
Distributors are directly pressured by the rising prices, as they are seeing costs of materials increase, deliveries lag and the cost of labor rise as well. Essentials like lumber and aluminum are very expensive and in short supply, making projects increasingly difficult to complete and potentially straining relationships with customers. In the last 6 months, 60.7% of U.S. construction businesses reported a significant increase in the costs of labor and materials.
How can distributors navigate these changes?
Despite the incredibly trying climate, distribution businesses can still thrive and prosper, with the right proactivity. Examining energy expenditure and finding areas to cut energy usage and therefore costs can bring down bills at a time when oil and gas prices are incredibly high. Planning ahead and budgeting for delayed delivery times can help customers be aware of the likely finish date of a project and therefore keep customer relationships strong.
Investing in technology is the most efficiency-boosting way to navigate rising costs and lower profits. New tech tools for distributors are constantly being developed and can save time and money, and help keep a business organized. As younger generations enter the construction field, there will be a greater need for modernization within a business, and implementing technology will only serve to make business functions systemized.
To learn more about how distributors can overcome inflation, check out our follow-up blog in our Inflation series: 4 Ways Distributors Can Mitigate The Impact of Inflation.
Download the full Inflation report
Prokeep has built a report on the current state of inflation and how distributors can overcome the challenges that it poses. Download your copy to take a deeper dive into inflation in the distribution space with the link below.
