(c) 2011 Joseph W. Webb, Ph.D. and WhatTheyThink

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Inflation Adjustment in the Printing Industry

Dr. Joe WebbDecember 6, 2011

(c) 2011 Joseph W. Webb, Ph.D. and WhatTheyThink

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“…one widely circulated forecast that predicts that real or inflation-adjusted commercial printing shipments

will fall by almost 40 percent over the next six years”

=

(Apologies to JK Rowling and theestate of Lord Voldemort)

(c) 2011 Joseph W. Webb, Ph.D. and WhatTheyThink

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Inflation Distorts Our Judgment

•#1 Avatar is #14, after Ben-Hur•#10 Spiderman is #35, after Love Story

#1 grossing movie of all timeis not Avatar, it’sGone With the Wind

(c) 2011 Joseph W. Webb, Ph.D. and WhatTheyThink

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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 WhatTheyThink

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Y/Y change in Printing PPI, CPI,and the difference between them

(c) 2011 Joseph W. Webb, Ph.D. and WhatTheyThink

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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 WhatTheyThink

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A much-too-simplistic explanation of inflation-adjustment methods

(c) 2011 Joseph W. Webb, Ph.D. and WhatTheyThink

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Results of Alternate Inflation-adjustment methodsFrom May 2011 “Historical Printing Shipments”

(c) 2011 Joseph W. Webb, Ph.D. and WhatTheyThink

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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 WhatTheyThink

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Inflation measures apply to different parts of the business’ income statement

(c) 2011 Joseph W. Webb, Ph.D. and WhatTheyThink

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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 WhatTheyThink

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The CPI reflects what you can buy with what’s in your wallet.

The power to purchase goods 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 WhatTheyThink

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Forecast of Conservative Model

(c) 2011 Joseph W. Webb, Ph.D. and WhatTheyThink

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Forecast of Aggressive Model

(c) 2011 Joseph W. Webb, Ph.D. and WhatTheyThink

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Forecast Results for 2017 Using Multiple Forecasting Models

(c) 2011 Joseph W. Webb, Ph.D. and WhatTheyThink

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Summary ofInflation 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 WhatTheyThink

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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 WhatTheyThink

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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 WhatTheyThink

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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)