Let’s Talk About Inflation

Inflation. It is a great talking point to some and for others it is a pain point.  Inflation can increase or decrease so it is in state of constant flux. While price modeling, inflation is just one factor we use specifically for outyears in a contract.  Some government clients state that no prices may be increased and in some requests they state it may be applied based on information from trusted sources, with bls.gov (Bureau of Labor Statistics) and bea.gov (Bureau of Economic Analysis).   

Inflation has been under severe scrutiny as of late and it is no wonder why.  I think we all remember the inflation approaching 10% a couple of years ago, and then at further, escalation was near 0.  That impacted quite a few things in the contract industry.   

• It brought proposed pricing under more scrutiny;  
• Some firms began to take advantage of the high inflation rates  

• Some wanted to continue low risk approaches; which, in my opinion, was good because of potential future audits and having to defend drastic price increases 
• Some wanted to dramatically increase their prices; which could be defended during very high inflation times but defending them by saying “because XYZ co did that too” does not and will not matter to government clients  

• firms began to include extremely high escalation factors in their proposed pricing;  
• firms also noticed hiring issues because as part of that inflation increase, candidates began to request much higher salaries (rightfully so)   
• The government, GSA specifically, even offered something to current contract holders.  They agreed to a period where contact holders could increase their published rates, as long as certain terms and conditions existed in their contracts; obviously proposing increases near the actual inflation at that time would not be welcome but still possible again; it comes down to risk.  As a side note, I was able to help a company increase its GSA based rates in a military contract and the increase was not excessive   

Since then, inflation seems to have settled to a more manageable level and GSA’s moratorium has ended and now typical escalations are expected.  BLS.gov is still a great resource for inflation (and using Consumer Price Index (CPI) data to drive proposed annual escalation in proposed pricing).  Trends indicate that is stays between 2.2-4.1%.   

 
Recently, on social media, I saw a former colleague state that inflation is at 18% (with no source mentioned).  Typically, I would not engage in responding but as a professional I felt I had to say something.  I shared bls.gov’s link and then stated that the current CPI is actually 3.5%.  Current being the key word.  The response was “yes but that is on top of the previous year so this makes the current inflation 18%”.  At this point I realized that this person was actually looking at an aggregate inflation and when I pointed that out I was told I was wrong; again, there was no proof.  I had to state again that current CPI does not mean what they thought.  I used gas price evolution as a point.  Back in 1993 the average gas price (nationally) was around $1/gallon.  Now in 2024, the average gas price is around $3.27/gallon.  Overall, this is an increase of almost 195% over 30 years but that is NOT the current CPI.  I was still told I was wrong and all data including the proof I sent was wrong and by someone who does not work in the industry.   Contact us to learn more!