Inflation is in the news lately, with companies busily passing along rising costs to their customers.
In this video from "The 5" on Motley Fool Live, recorded on Oct. 4, Fool.com contributors Brian Withers and Demitri Kalogeropoulos answer a question about how these price increases move through the supply chain.
Brian Withers: "Good afternoon, Fools. When supply chain causes price increases, who gets the extra money I pay for my creamer or my oatmeal?" That's a good one. Do either one of you want to take that? I'm happy.
Demitri Kalogeropoulos: I can take a little stab at that right now. I've been covering a lot of earnings reports that talk about that in their conference calls management. Normally what will happen, it's basically a time lag situation.
What a lot of companies will do as their costs are going up, McCormick (MKC +0.04%) is the one that I'm thinking of, the spice maker of spice and flavorings. They've been noticing their prices going up for maybe six months now. What they tend to do and a lot of companies tend to do, is they don't immediately raise their prices in that situation. There is a lag to that.
Basically, McCormick's taken a hit earnings wise for about six months. Then if they don't go down, they start raising the prices. Then they just recuperate, I guess you might say, some of that if the prices go down.
But it's not immediate, and in some cases it'll just go back down and what they're hoping is that, companies don't like to raise prices in those situations because it's an invitation to move your business elsewhere, obviously. If they can get away with not doing it, they'd rather do that. But if costs keep rising where they don't go back down, then you're going to see that reflected in the price increase.
Withers: Generally, if you think about backwards through the supply chain, McCormick has to buy things in order for their manufacturing to run, and they buy it from companies who are hiring people. It's a potential that those companies had to pay more to get their employees on board. It's potential that McCormick had to spend more money to get the goods transported to its factory to build that stuff together.
Whether it's a logistics company who is also potentially paying spot bonuses for workers to work overtime or buying extra planes. All of this things are, whether it's workers or more equipment or more capacity, do you think back through the supply chain, all of that adds up as it gets closer and closer to the consumer?
The longer the supply chain is, if you're over in the far east and having stuff delivered through the port of LA, there's a bunch of things that add on costs through every hand-off and every step of the way and it's potentially that cost builds up over time. That's where the extra money goes.
