Dr joewebb inflationadjustment 120611

“…one widely circulated forecast that predicts thatreal or inflation-adjusted commercial printing shipments will fall by almost 40 percent over the next six years” = (Apologies to JK Rowling and the estate of Lord Voldemort) (c) 2011 Joseph W. Webb, Ph.D. and 2 WhatTheyThink

Inflation Distorts Our Judgment #1 grossing movie of all time is not Avatar, it’s Gone With the Wind•#1 Avatar is #14, after Ben-Hur•#10 Spiderman is #35, after Love Story (c) 2011 Joseph W. Webb, Ph.D. and 3 WhatTheyThink

Last Week from PIA Newsletter• “…printing shipments should be adjusted by printing prices and not overall consumer prices”• “…these two variables typically move in different directions and at differing rates.”• “Over the past few years printing prices have remained relatively stable or even declined in some years.”• “…consumer prices have generally increased at a modest pace.”• “A methodology which uses the consumer price index to adjust printing shipments from nominal to real vastly underestimates past printing shipments and future growth.” (c) 2011 Joseph W. Webb, Ph.D. and 4 WhatTheyThink

Why Inflation Adjust?• Managerial – Stay ahead of cost changes that will affect their business operations• Volume – To estimate underlying physical volume, the printing PPI might be useful, but can have problems• Viability – To estimate the financial health and well-being and future outlook of owners & employees, CPI is probably the better choice (c) 2011 Joseph W. Webb, Ph.D. and 6 WhatTheyThink

Why CPI• Volume is not important, but dollars are• Productivity is a $$$$ issue – Increased output of unprofitable goods creates problems – Print businesses have always considered productivity to be a throughput issue – Throughput is only applicable if marketplace demand and pricing is always stable (c) 2011 Joseph W. Webb, Ph.D. and 9 WhatTheyThink

Why the CPI is the most important inflation measure• Not all PPI changes reach the marketplace; businesses adjust their costs – Revolution in information technology and distribution logistics and management – PPI does not account for conservation, productivity, or changes in the formulation of goods• The long term trend, with some pauses, is for overall PPI to be higher than CPI (c) 2011 Joseph W. Webb, Ph.D. and 11 WhatTheyThink

The CPI reflects what you can buy with what’s in your wallet. The power to purchasegoods is what motivates and rewards owners, investors, employees. By definition, you can’t go to a store and spend PPI dollars because they’re not in your wallet (c) 2011 Joseph W. Webb, Ph.D. and 12 WhatTheyThink

Summary of Inflation Adjustment Rationale• To estimate industry volume alone, PPI for printing prices is a valid choice• To understand the economic and personal purpose of an enterprise, CPI is the better choice – You may sell goods at PPI printing prices, but you buy food, shelter, and services in a CPI marketplace• All inflation adjustments methods are flawed in one way or another• When in doubt, use multiple methods – Always be sure comparisons use similar methods – If afraid of distortions, use current dollars for all methods• Seek data in some form of units first, if available (c) 2011 Joseph W. Webb, Ph.D. and 16 WhatTheyThink

Don’t Rely Solely on Quantitative Methods of Forecasting• All quantitative models are based on past market conditions and cannot reflect future conditions• Forecast often: all WhatTheyThink multi-year forecasts are updated every month• Multiple forecasting models must be combined with new knowledge of the marketplace such as new products, new competitors, new regulatory issues that only executives can provide• The WhatTheyThink industry forecast always provides current dollar data, inflation-adjusted data, and our judgment-based “final” forecast, revised every 6 months. (c) 2011 Joseph W. Webb, Ph.D. and 17 WhatTheyThink

Know Your Data• PIA industry forecasts include commercial printing and trade services plus packaging, inplant, and newspapers printed by newspaper publishers with printing facilities – PIA industry definition is very broad, therefore the industry size reported is larger than commercial printing alone• WhatTheyThink uses data from the US Department of Commerce, Census industry code NAICS 323. – Definition and links to Census background is online – Commercial printing + trade services; commercial printing includes label and wrapper printing but not other packaging; it includes newspapers printed by commercial printers, such as weeklies printed by a nonheatset offset commercial printing company (c) 2011 Joseph W. Webb, Ph.D. and 18 WhatTheyThink

Resources• Dr. Joe Webb columns that explained inflation adjustment appeared in WhatTheyThink on May 20, 2005 and April 14, 2008.• Regularly updated online printing industry data by Dr. Joe Webb and WhatTheyThink – Printing industry profits data (Google spreadsheet) – Printing shipments data, US & Canada, and forecasts (Google spreadsheet) (c) 2011 Joseph W. Webb, Ph.D. and 19 WhatTheyThink

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Dr joewebb inflationadjustment 120611

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