In corporate offices in Minnesota and around the country this year, one topic has dominated conversations nearly as much, and even more in some cases, as the coronavirus — inflation.
Consumers are experiencing inflation in one way, by paying more for rental cars, groceries or other goods. But the people running businesses are experiencing it as disruptions to workflow, threats to profits and tough decisions about passing rising costs on to customers.
Over the last four weeks, as publicly traded businesses reported their financial results from spring and early summer, executives in Minnesota described the exceptional time it's been.
Higher costs are "coming everywhere," Mark Sheahan, chief executive of Minneapolis valve manufacturer Graco Inc., told investors and analysts last month. He then ticked off a list of the core components in Graco products, including steel, aluminum, copper and plastics.
"And some of the components that we buy also, like electronics and motors and engines, and even like subcontract premiums that we pay to folks that help us out when our demand spikes up, those are all much higher," Sheahan added. "Freight costs are higher as well."
The amount of discussion about cost inflation from executives around the country was at "all-time highs" during the recent earnings season, Mike Wilson, Morgan Stanley's chief investment officer, wrote in a note to investors.
Because the last period of high inflation in the U.S. was in the late 1970s and early 1980s, a generation or more of business executives never saw, nor had to act on, such rapid change in costs and prices. The effects today are visible in businesses of all stripes, but particularly at manufacturers.
Executives at Bloomington-based Toro Co. in June described a flurry of contract renegotiations with suppliers that its operations team undertook this spring to slow the effect of rising costs.
At Polaris Industries Inc., the maker of off-road vehicles and motorcycles based in Medina, an executive described weekly meetings to assess commodity and logistics costs.
Executives at C.H. Robinson said the logistics company, based in Eden Prairie, lost money on shipping loads that were contracted before fuel and other costs soared. But its profit jumped as it relied more heavily on spot contracts that covered costs.
For many businesses, wage inflation remains a wild card. According to the Federal Reserve Bank of Atlanta, which tracks wage growth, low-wage workers this year are experiencing the biggest gains in pay in more than a decade.
Target Corp. and Best Buy Co. now pay entry-level workers $15 an hour. Other companies also are raising wages as they encounter trouble finding workers.
Broadly, this year's inflation is largely seen as an outcome of the recovery from the swift recession over the global economic shutdown to curb the spread of the coronavirus. The biggest price increases have been in goods and services that were hit hard by the pandemic, those in which demand quickly fell last year and then roared back this year.
For instance, the resurgence of ocean shipping is a big contributor to higher costs for Fastenal Co., a maker and distributor of fasteners and other industrial products based in Winona.
"It's gotten really expensive to move a container across the ocean," Dan Florness, the company's chief executive, said last month. "And it takes a longer time than it did 12 and 18 and 24 months ago because of all the congestion at the ports. And so, massive inflation going on."
Official measures of price gains — around 5% at the consumer level and nearly 10% at the producer level — are at their highest levels since at least the end of the 2009 recession and some since the early 1990s. But the pace of gains leveled off in July, and bond market rates, considered a signal of investor sentiment about inflation, eased.
The latest big Minnesota company to report quarterly results, Best Buy, said last week that its customers have been seeing higher prices mostly because there has been less discounting, particularly in electronics where chip components have been in short supply.
Discounts and promotions started to reappear last month, and more are expected as the holiday season nears, said Matt Bilunas, the company's chief financial officer. In addition, the retailer saw a "little bit of inflation" in certain product groups. "Appliances is an example where there has been increases to the cost of those goods," he told analysts.
Target executives earlier this month nodded to the challenge of higher product and freight costs, but they said they were able to manage it and maintain profitability by marking down fewer items and selling more higher-profit, private-label goods.
"Value matters," Michael Fiddelke, Target's chief financial officer, said on a conference call. He added, "We want to make sure that our guests continue to find that value going forward, inflation or not."
On many of the recent calls with executives in Minnesota and across the country, analysts probed whether companies were able to raise prices of their goods and services to cover the higher costs they were encountering.
Tennant Co., a maker of industrial cleaning equipment based in Eden Prairie, just raised prices outside its normal schedule, citing the pressure of higher costs.
"It's obviously early to gauge customer feedback about that increase," David Huml, its chief executive, told analysts early this month. But he added, "I don't think that anyone will be surprised."
Winnebago Inc., the Eden Prairie-based maker of recreational vehicles, has also lifted prices. But its gross profit margin dipped in the latest quarter because dealer contracts prevented the company from raising prices high enough to offset rising costs.
"We are watching carefully the potential impact of pricing due to cost inflation and the moves we're taking," Michael Happe, the company's chief executive, said. "So that if we do start to see a step down in consumer interest because of pricing, we manage that effectively."
