February 13, 2023

Calculating Purchasing Performance in the face of inflation and price increase

By Patrick Chabannes

Listening to the debates of economists, the discussions of Purchasing Managers, the questions of Suppliers all talking about inflation and price revisions, this question came to me: Are price increases and inflation really synonymous? And if not, what is the impact on the Purchasing Performance calculation?

Are inflation and price increases synonymous?

On the one hand, according to the work of Milton Friedman, inflation is always a monetary issue and he wrote in 1970: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can only be generated by an increase in the quantity of money that is faster than the increase in production”. Insofar as inflation is linked to interest rates and the money supply, it is reasonable to think that Purchasing Departments cannot do anything about it since it is a question of monetary devaluation.

On the other hand, price increases, or more precisely price variations, depend on the supply and demand of economic agents, tempered by more or less interventionist government actions. In this field, Purchasing Departments are in the front line, working on the supply chain, on supplier relations, on materials, on consumption…

Is it possible to extract the inflation component from the price increase?

Far be it from me to answer my own question, but isn’t it worth asking? Is it even possible? Is it desirable? Is it useful? Has the IS Purchasing Providers thought about it? 

Credit: image Charlie Hebdo June 2021

We hope to deepen this subject with the Purchasing Departments in the coming weeks.

Lectori salutem, Patrick