Is Inflation Really Down?

Recent government reports show the Consumer Price Index is now down to 2.9%. Politicians are shouting, "Hurray!"

Not so fast...

There's a lot more to inflation than one number. Political powers tend to manipulate information, and change metrics to improve results over actual outcomes. While some may be celebrating a drop, others look at their pocketbook and don't see any improvement. This episode of Books & The Biz digs into the issue of Inflation and how it impacts business. Even if you aren't feeling impacts right now, you need to be proactive to protect your growth.

[00:00:01.180] - Alice

Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltre Group and a financial strategist working with companies to manage their money more effectively. Now on to the podcast.

[00:00:32.320] - Dan Paulson

Good morning and welcome to Books in the Biz. We are here. I am back with my good friend Rich Veltre. Rich, how are you doing today?

[00:00:38.460] - Rich Veltre

I'm doing well, Dan. How are you?

[00:00:40.430] - Dan Paulson

Excellent. Couldn't be better. If I was any better, I'd be you. Hey, When we were talking on the last podcast, we came up with our subject for this podcast. So to fill our listeners in, in case you missed that part of it. I've seen this posted a number of but we were rolling into inflation when we were talking last week. Somebody had posted about how they had an 18 % mortgage back in the late '70s, early '80s, and they can't understand why people are so riled up about the fact that mortgages are right now at six or seven %. And I'm like, well, there's truth to that. I don't know. I think we're both young enough to remember it, but not old enough to have participated in it. But I do know that there was a time when you bought a mortgage and it was an 18 % interest rate, and basically you paid your interest. It was like an interest only loan. The idea was that you were going to make up for it on appreciated value of your asset, and that's where you were going to get out from underneath the big rock that they planted you under.

[00:01:52.720] - Dan Paulson

Don't know how well that worked. That was like almost subprime stuff, but that was dealing with it back in the '70s and '80s. We're Nowhere near that now, which is good. But there's a lot of other issues going on. And I think if you looked at just home prices, that would be one thing. But you look at home prices, you look at grocery, you look at gas, You look at utilities, all these other expenses have shot up dramatically. And I think it's worth talking about that because that affects businesses directly. It's either going to affect their profitability because now they might be paying more in cost of goods sold. They're definitely paying more in labor because, of course, during the 2020s, we saw labor spike to try and keep up with inflation, and also to get bodies in the door, because if the next guy was going to pay $20 an hour, maybe you had to pay 22 or $23 to get that person in your door. So it's not like inflation goes away. But it is an election year, isn't it, Rich? Last I checked, I get a Commercial about every 30 seconds telling me it's an election year and telling me who to vote for.

[00:03:07.090] - Dan Paulson

Well, campaigners like making campaign promises. And of course, with inflation right now, I One of the biggest one, there's two big ones. One, both candidates have jumped on, which is no tax on tips. Maybe we can talk about that a little bit later. But probably the bigger one is price gouging. And a Apparently, price gouging is a relatively new thing. It's just happened in the last couple of years. Not so sure that's the case.

[00:03:38.570] - Rich Veltre

I don't think so.

[00:03:41.560] - Dan Paulson

I mean, we look at the numbers a different way, and it's hard to say what's price gouging. Now, I will say, in all honesty, price gouging does exist to a certain extent, but the market takes care of itself. Because if you feel like you're getting gouged on prices, what happens?

[00:03:56.950] - Rich Veltre

You go somewhere else.

[00:03:57.810] - Dan Paulson

You go somewhere else. You don't buy it. Takes It's a scare of itself. And eventually, those prices come back down. Well, our illustrious political leaders feel the need to swoop in and save the day, and that could lead to further business problems in and of itself. So Rich, You're the finance guy. I'm going to turn over you. Talk to me about price gouging like I'm a five-year-old. Explain it to me.

[00:04:22.470] - Rich Veltre

I think we just did. I mean, basically, it's funny, though, when people sit there and they say, okay, prices have gone up, inflation, inflation, inflation. And they talk about the fact that everything's costing me more. The fact of the matter is, some of those things will just stay there. Inflation, to me, says, yes, as you mentioned, cost of goods sold is up, labor is up. But they're not going to come back down. They're going to hit a high, and people are going to say, this is the new normal. And then And when it becomes the new normal, then everybody has to adjust. Okay, so what's the true inflation? The true inflation is the fact that some costs are higher because it goes back to supply and demand. You want that set of two by fours, and you find out that that two by four is now more expensive. Why? Because it was harder to get. So that, to me, is the inflation factor. That, to me, is the reason why things are costing more. And those things may actually come back down. But like you said, the examples you gave, other things that are in cost of goods sold, including labor.

[00:05:36.470] - Rich Veltre

I think we are looking at the new normal. I think the inflation rates are what they are. The inflation that's happened is going to stay. And even back to the home prices and the prices of the mortgage, the interest rates, I think they're going to stay up. I don't think they're going to go back to that three, four, five % rate that everybody I just I don't see it. I see it being, okay, this is again, new normal. And get used to it and adjust to it just like they did back in the '70s and '80s that we mentioned.

[00:06:13.760] - Dan Paulson

Yeah, I agree with you. I think housing prices are now at a new standard that they weren't just a couple of years ago. It's hard to say with interest rates, though, because the only lever that our government seems to have to pull is interest rates. So if the economy appears like it's slowing down, they lower interest rates down. The economy is going up, then they raise interest rates to try and manage that growth so it doesn't go too crazy. And every economist I've heard from has pretty much said that it's really like you have a hammer and everything's a nail. So that's really the only thing they got is they've got a hammer and they use it liberally sometime. I pulled up an article here. So if you're listening to this, you're not going to see it. But it was on Investopedia as why is the consumer price index controversial? And consumer price index is what the government really bases inflation on. And what I was trying to figure out, and again, maybe you can help me with this, is they've changed how they measure inflation over the years. We go back to, again, the '70s and '80s, we saw very high inflation numbers.

[00:07:30.030] - Dan Paulson

And even a couple of years ago, when we saw it spike, they were saying, well, it was 18 % in the '70s, it's only nine % now. Well, nine % is still bad. But why? I mean, most people, I think, would say it feels just as bad if they lived through both times. Do you know what they changed? Do you know how they changed recording it?

[00:07:53.450] - Rich Veltre

I don't know the specific pieces that they've changed, but they're always changing. This actually is what we were talking in the last podcast, that spiked the how we should probably talk more about that. And the fact of the matter is, when they don't like the answer, they seem to want to change the formula. But Everybody always seems to have a really good idea, a good reason why they would want to change it. But to me, the biggest thing is you have to give people consistent calculations so they can tell that something's different. So they can tell that, yes, as you said, 18 % versus nine %. But if you change the formula, it's not 18 versus nine. It's 18 versus whatever nine should have been. So it gets difficult to try to weed through the junk that gets thrown in front of you. I live in the world of accounting, and we've lived in the world of accounting, and consistency and comparability are two major pieces to why accounting is what it is. You want to be able to compare 2023 to 2022 and know what changed. And if you don't calculate it the same way, there's all kinds of rules out there for how you have to disclose the fact that you changed it.

[00:09:19.370] - Rich Veltre

So I don't understand why it's okay in the news media, in the government, to just say, well, we're just going to change it, and then everybody's just going to have to live with it.

[00:09:29.280] - Dan Paulson

I don't even I don't think they tell us that they change it. They just change it. And then it's like, well, look, the numbers are so much better. It comes to the point, well, you give me data, and I will figure out how to manipulate that data to be in favor of what my opinion is. And that's pretty much what's going on here, isn't it?

[00:09:46.730] - Rich Veltre

So it's no different than when we talked about unemployment rates. It's like, how do you know that the unemployment rate is better now than it was a year ago when you changed why you or how you came up with the number? So I'm not I'm comparing apples to apples. I'm comparing apples to oranges. An apple is not an orange, it never will be. So at that point, I've got a whole new trend because I have no history because you've calculated it a different way. I mean, I don't know what else to tell on that because it drives me crazy.

[00:10:19.130] - Dan Paulson

I think it drives all of us crazy. As a business owner, to me, the challenge of all this is, try to figure out what's next. So again, as of this recording, we're in an election year. We're trying to gage our clients' resiliency, if you will, to continue making purchases, to continue growing. We work with a number of different companies in a number of different industries, and all of them are at different peaks and valleys. I did a recent survey, and most of my clients tend to be manufacturing and construction. And one of the questions was, are you doing as well? Are you doing better? Are you doing worse than you were the previous year? And a vast majority said they were actually up. Now, I didn't ask the question, are we up because inflation created higher numbers? So again, if you compare year to year, sales have increased, but are we then looking at cost of goods sold and everything else? I'm guessing across the board, they're feeling more confident with it. But then you go to the consumer side, and we're starting to see the early inklings that maybe things aren't as good as some would lead it out to believe.

[00:11:35.840] - Dan Paulson

We're starting to see businesses cut back. Unemployment rates are starting to trickle up, at least as far as what they're tracking now. I think people are being more cautious about where they're spending their money, which, again, is typically a sign that, recessionary triggers are coming into play, because people are spending less on maybe be going out to eat. We actually, I didn't pull up the article here, but we had a group that holds a number of fast food chains in the area, shut down their entire operation in Wisconsin. All their stores. Now, I think it's a PE, so they have a private equity company, so they have holdings elsewhere, but they close five locations in Wisconsin because they really didn't say, but it sounds like they were underperforming. Now, that could be a number of things. It could be quality of food, it could be quality of service, it could be getting enough help, whatever you want to call it. But all those things come into play because typically, if we see quality of product or quality of service go down, a lot of times that also is a sign of inflationary tactics because we're doing everything we can to cut costs to increase profits.

[00:12:56.340] - Rich Veltre

I think you're going to see a a lot more of that because there is a... The jump in prices is problem number one. The extended interest rates is problem number two. Because interest rates translate to your cost of capital. How much did it cost you to actually have the dollar that you had in your pocket? And as those prices stay high, that's when people start to realize that the reaction time is slow. At first, you think, well, everything's fine. I have a whole bunch of extra cash. I'm good to go. I'm not going to worry about it. It's a short term effect. As the short term turns to long term, people start to realize that that money that was in my pocket, there's less. And everybody realizes it a little bit at a different time. So as those people realize that I don't have as much cash, whether it's a business owner, personal, everything is the same, right? It's run by people. So the reaction time is different depending on the person. But a business now is starting to see, I can't spend that money like I could last month or last year. So now I have to start to scale back because this is no longer a short term problem.

[00:14:17.560] - Rich Veltre

This is new normal. This is my new quote for the podcast.

[00:14:21.830] - Dan Paulson

The new normal.

[00:14:23.340] - Rich Veltre

And the thing is, I really don't like new normal. It's not a term that I like or not a phrase that I like. But unfortunately, I think that's where we're at. I think this is a little bit of the new normal, and everybody has to start thinking slightly differently, if not significantly differently, because your plans may not be good. They may not work anymore. The plan you thought you would have first quarter of this year may not look the same in third or fourth quarter of this year going into 2025.

[00:14:58.200] - Dan Paulson

So with that, from a financial perspective, I'll just ask you this question. We're going into the fall of, again, an election year. We know election years, many businesses get a little skittish and they pull back because they want to see what candidate they're going to have to deal with after November, and then they start making decisions on it. I mean, what should they be looking at financially now to prepare for whatever is coming in the future? Because as you pointed out, every business This is different. I believe all businesses have a lag time. So things might be really good today, but a year from now, two years from now, it might be a different story. And that to me just hints at construction, because it seems like construction is always about two years out. So they're starting to feel a leveling off now. What could happen two years from now is a completely different story. But they're looking at going, well, my sales are up, my profits are up. I still have work to do. But that works typically already been in the books, already been financed, which is why you have it. You take a grocery store, though, the things that are more commonly associated with the consumer and whatnot.

[00:16:15.030] - Dan Paulson

And that's, of course, been on the mark with the current administration. You need food today. You don't need food two years from now. You're going to the store because you're going to buy something you're probably going to consume within the next five to seven days. And And as a business, how do we have to look at that stuff?

[00:16:36.150] - Rich Veltre

Especially on an example like that, I think if you're two years in advance looking ahead, I'm a conservative guy, so I would actually go back and increase it. I would increase the idea of how much cash you should have on hand. And I would do that early, whether that's a month. You know your business better than I do, and I'm not going to pontificate from here how much you should add. But I think you should definitely consider that there's going to be a hit somewhere in your business. You're going to come up short somewhere in your business. So plan now for it and increase a bit. Say, if I normally have to have a couple of months of cash on hand, add a month or two and see if you can make that work with the same numbers that you're figuring Number two, assume that all of these promises of we're going to take care of inflation, I don't know about that.

[00:17:42.420] - Dan Paulson

Well, in some ways, we hope they don't do do it because it's not going to make things better. It's going to make things worse.

[00:17:48.490] - Rich Veltre

Yeah. I mean, how are you going to do that? As we said already in this podcast, if the labor cost is one of the factors that we're having to deal with, how are you going to reduce the inflationary costs related to labor? You're either going to have to lay a bunch of people off. Okay? Or somehow, which I think is illegal, you're going to go around and tell all these people, Hey, by the way, we're going back to 2020 levels on your salary?

[00:18:23.530] - Dan Paulson

Well, you can do that if you notify them, but how many people are going to stick around if If you tell them, Oh, your pay is being cut by 40 %.

[00:18:32.360] - Rich Veltre

Yeah, you can't win. You can't win on that. So I don't understand how somebody can just say, Well, we're going to take care of inflation and everything's going to go back to normal. What's normal?

[00:18:41.760] - Dan Paulson

Well, here's another part to that labor cost, Rich. They're polling on actually raising the minimum wage, and they want to move it to $15 an hour, $20 an hour, wherever it's going to be. Well, if you do that, you're actually enhancing the inflation Because if everyone makes more money, and trust me, people should be paid a fair wage for what they do. They should be paid what their current market supports. Not all jobs are lifetime jobs. We can go around and round about that. But the bottom line is, if you raise the bar to where now everyone's making 15 to $20 an hour, that money, yes, they make more money, but then it forces the cost of rent, food, everything else then goes up because there's more people able to purchase at the current levels, which then creates shortages, which then, according to Economists, pushes the price up because you got to meet that balance where price and quantity align. Yeah.

[00:19:43.600] - Rich Veltre

And the thing is, So it ties back into conversations that we've had in the past. We talked about minimum wage. When minimum wage was going to come in, and all these businesses turned around and said, well, okay, that sounds great. Thank you very much. And then they turned around and they automated, or they made other changes so that instead of hiring 20 people this year, they hired 10. Those other 10 people are out looking for a job. So suddenly, unemployment starts going up. Who's paying for those people? Benefits come from the government that, oh, if you're unemployed, we'll cover you for X dollars. So one way or the other, there's dollars going out. And it's taxpayer money that's going out. So Okay, so everything gets to be a little bit more expensive. And then you add on the fact that now taxes are going to wind up going up. Somewhere along the line, they're already talking about it, that somewhere along the line, we're going to have to pay more taxes. Okay. Or fees. They'll sneak one in on you, and all the fees will go up. Oh, yeah. We didn't tax you more. Okay.

[00:20:52.310] - Rich Veltre

But you feed us to death.

[00:20:54.750] - Dan Paulson

Yes.

[00:20:59.330] - Rich Veltre

Sorry, getting on my soapbox there. But somewhere along the line, costs stay. Even if you tell me that you're going to decrease costs, taxes will go up. My cost is not going to benefit. I'm not going to gain anything by anything that either candidate is going to do in January.

[00:21:16.120] - Dan Paulson

Yeah. And I've got something up here on the screen, so most people aren't going to be able to see it. But this is also something we were talking about a little bit before we jumped on. So I'll let you expand on it a little bit more. But people often don't understand inflation because our government does a very poor job of explaining the impact of inflation. They say inflation is coming down. It's really not coming down, per se. It just means we're adding less to it. Maybe you can explain a little bit better than I did.

[00:21:49.440] - Rich Veltre

I think we have to be careful when we're listening to people who say, I'm going to take care of inflation. What are you looking to take care of? Are you looking to actually take care of the fact that my cost of milk went from $2 to $4, and you're going to bring it back to $2? That's what everybody hears. What they're saying is the $4 is not going to go to $5 because we're going to stop the rate. We're actually going to work on the inflation rate not the actual inflation. They're not going to put milk back to $2. I don't see it. I hope I'm wrong. Please come back to the podcast next time, and you can yell at me and say- Well, I hope you're right, because coming from a dairy family, I can tell you, if milk goes back to $2 a gallon and all the other things being equal, we will now have a shortage of milk and cheese and ice cream and everything else that we enjoy because it's going to be unprofitable for farmers to do the job that they do.

[00:22:47.240] - Dan Paulson

The only way you would get it back to $2 a gallon is you'd have to lower the costs of everything else to make it more affordable again. And that's the cumulative part of inflation that people don't talk about or they forget about. So I've got a graph up here. And we look at inflation, 14, 15, it's 0.8, 0.7 %. It was really, really low. Then it jumps up to 2.1 And then it's 1.9, 2.3, 1.4 in 2020. So that I think, and again, correct me if I'm wrong, it seems to be the number that most economists are happy with. There's got to be some inflation, because if there's no inflation, Then there's other economic problems that happen with that. If there's too much inflation, the same thing. There's just not enough income to support it or money to support it. But then we see it jump up. So what we forget about is that the 0.7 adds to the 0.8, the 2.1 adds to the 0.7, the 2.1 adds to the 2.1, the 1.9 adds to the 2.1. These numbers are building on top of each other. So when they say they're lowering inflation, they're really just slowing the rate that the inflation is increasing.

[00:24:04.910] - Dan Paulson

That's a good thing, but it's not eliminating inflation, nor are they often able to slow it to where they want it to be.

[00:24:12.960] - Rich Veltre

Yeah. It's definitely the rate of inflation that they're talking about, not inflation itself. So set your expectations right for when they're speaking, because they're not going to speak to you like you are trying to hear. You're trying to hear that my grocery bill is going to drop, and it's not going to drop. This is what we were talking about before. It becomes time now to start thinking about things differently than you did before. And I don't want everybody to just run out and say, well, if everybody else is going to charge more, I'm going to charge more. That's not necessarily the answer either. You really have to look at your business and understand, if I raise the prices, what's the risk? Because the risk is exactly what also you said before, that if the price is too high and everybody wants to call it price gouging, if the price is too high, there's somebody else out there who'll do it for a couple of dollars less. So be careful. Don't just, oh, I'm just going to raise prices because everybody else did. Well, apparently, there's going to be people out there who did not. And they're going to be your new competition.

[00:25:26.450] - Dan Paulson

To me, from the operations side, as I'm thinking about all this, how do we battle inflation? Some of it is going to be increasing prices, but probably just as importantly is going to be getting more efficient and trying to figure out ways to mitigate certain costs. Now, in some of the industries I deal with, that could be more automation. You're putting in a robot or a machine to do the work that you might have had one or two humans do. While the costs might be higher in the short term, over time, that robot doesn't get sick. It can work seven days a often can work 24 hours a day until it breaks down, you can significantly lower your output costs that way. I think it's definitely worthwhile for every business if they go through a strategic planning process or go through some review, either every couple of years, typically 2-3 years, you should be looking at what you're currently doing and what's inefficient about what you're doing. Map your processes out, look for those redundancies, look for areas where it shows down quality or service, and find ways to remove those issues from the pipeline.

[00:26:36.350] - Dan Paulson

So that way, without raising your fees, you're making more money because now you're wasting less time doing things you shouldn't be doing anyway. And that's probably the easiest fixed in the most cost-effective one, because you're not affecting labor and you're not bringing in new equipment. But I agree with you. I think businesses right now have to start taking a hard look at not today, but two, three years from now and say, where am I going to be at and what condition am I going to be in? And I don't believe it has anything to do with who's going to be the next president. It really comes down to we're on a certain course right now, and whoever comes in, they can promise all they want. They're probably not going to be able to change directory too much. Unfortunately, if they are able to, it's probably not going to go the way we want it to. It's probably going to go the other way. So it's really important to look at your operation, figure out how you're going to optimize as best as possible, both financially and mechanically or operations-wise.

[00:27:37.440] - Rich Veltre

Right. I can't disagree with you on that one. I think that it's one of those things that you really do have to sit down, look at your business, break it down, as you said, into processes. And probably at this point, if you've never had the need to do a budget forecast, a written plan that you can look back at. If you haven't done that before, do it now. I think you really... I've seen a lot of people that I've gotten 100 % successful results because they know their business really well, and they can follow the same path, and it'll just keep going. But I think there's enough red flags going on right now to say, I think you don't want to find out the day that your plan misses, because it's going to be a big miss. It's not going to be a small miss, it's going to be a big miss.

[00:28:37.960] - Dan Paulson

It still surprises me the number of businesses who don't know their numbers. Don't read the PnLs, don't look at the balance sheet, don't pay attention to what's in the bank account, going back to your, I have this barrel of money. As long as there's money in the barrel, I make profit. Well, we both know, and I think there's a lot of people out there that realize that That's not an accurate way to measure your success. And as inflation creeps up, and as the lawmakers change laws that could affect business, you got to be prepared for those things. So Rich, if they need to get a hold of somebody, maybe to help them with a plan, or at least help them understand their numbers, who do they contact?

[00:29:22.050] - Rich Veltre

Contact me. My best contact info is my email address, rveltre@veltregroup.com.

[00:29:28.710] - Dan Paulson

Excellent. And as I, if you need to get a hold of me for operations or need to get a hold of both of us for that matter, you can reach me at danpaulsonletsgo.com. There is a form there you can fill out, and I'll be happy to reach back out to you, and we can set up a meeting to see how we can help you get things back in line. So Rich, as always, vibrant conversation here. I think we solved the world's problems. We should probably look at going for President and VP ourselves. Personally, no, never going to do that. But either way, it's been a good conversation, and I'm sure there will be more discussed in the coming weeks.

[00:30:07.090] - Rich Veltre

Absolutely.

[00:30:08.390] - Dan Paulson

All right. Take care, sir.

[00:30:10.200] - Rich Veltre

All right. Take care.