What is the impact of inflation on biotech purchasing?

Inflation was reported in the UK and US last week and it was a welcome sigh of relief all round! As we kick off our annual project to secure the best prices from 1,400 suppliers on behalf of our biotech customers for the year ahead, we’ve been reviewing their macro environment to provide us some insights. We thought it would be useful to share our analysis on how inflation is likely to affect their pricing in 2024, including on lab equipment and consumables. We asked our CEO, Caroline Briggs , to explain the impact of inflation on biotech purchasing and what to bear in mind in your trading relationships.

Using Inflation Data as a Purchasing Professional

It is really important to understand the macroeconomic environment that businesses operate in, and tracking inflation is one of many useful indicators that buyers and sellers should use. The national pictures are indicators that give you a steer; particularly fuel, oil and wage inflation, as these can have wide ranging impact.

The astute buyer will always look to understand how this information can be used for each circumstance and it’s relevance. Professionals will also be evaluating the total cost model and evaluating how changes ultimately impact the net costs.

In general, it is always better to have intelligent sellers and buyers that can have a transparent factual conversation about the market conditions and the impact this has to their trading relationship, than blindly bartering with one another.

Sellers are often keen to demonstrate inflationary impacts to buyers. A reasonable debate must be had as to how to fairly share and impact both parties. Equally, buyers must track the trends so that when high prices and inflation is reversed, prices must re-normalise.

Different Measures of Inflation

There are a number of measures for tracking inflation depending on your purpose. The most familiar one is Consumer Price Index (CPI), which is a measure of the change in the total cost of a basket of household goods and services over a period of time.

Producers Price Index (PPI) is used to measure inflation at a wholesale level. PPI uses goods bought and sold by manufacturers. There are two flavours:

1. Input Prices – The change in raw materials or fuels purchased.
2. Output Prices – The change in the goods leaving the factory gate, which includes raw materials, labour, margin, and energy, as well as interest and site costs.

CPI can drive wage increases, which in turn could impact PPI.

What’s Inflation at Today?

The UK and US governments have both recently released their October 2023 inflation information.

Electricity, Gas and Other Fuels to October 23

The good news is that the annual fuel inflation rates are negative and at the lowest inflation levels since records began in the UK, and its mostly deflation on fuel in the US too.

The UK Office for National Statistics* have some great graphs showing recent trends in the UK as follows:

This table shows a more detailed breakdown of UK and US price inflation for motor fuels, gas, and electricity:

CPI to October 2023

CPI trended downwards from September to October 23. Interest rates remain high in the UK (5.25%) and US (5.5%) in an attempt to curb inflation. Both the UK and US governments predict a continued fall in inflation, with it being anticipated that it might take until 2025 to return to normal levels of 2%. This table shows the details of UK and US rates of inflation on both actual CPI in the 12 months to October 2023, and the predictions for the next 6 months:

PPI to October 2023

PPI can be more useful for a business, but care must be taken and it is made up of ten Product Groups, some of which could be completely irrelevant to your own business. This table shows the details of UK and US rates of inflation on both actual PPI in the 12 months to October 2023, and the predictions for the next 6 months:

Looking at UK and US PPI over time, it is a relief to see that the outlier rates of 2021 and 2022 have been reversed. Again the Office for National Statistics* have some interesting graphs demonstrating the historical data on trends over time:

These tables show the annual rate of inflation for UK Input and Output PPI, and for US Goods and Energy:

Conclusion

Reduction in inflation is a welcome situation. Inflation does not have a direct correlation to price changes, and care must be taken to understand the different measures of inflation as well as their relevance to any situation. It’s one macro-economic measure readily available that the savvy buyer, who can seek to understand and then judge the relevance in their category and impact to the total cost of goods. Trends must be tracked both ways, and buyers and sellers should ensure fairness and proportionality when agreeing the impact of changes, noting increases and decreases.

Next Steps

To talk to one of our team about how Amici can help your business with biotech procurement, please contact Chris Roarty .

*Sources

Cost of living insights - Office for National Statistics (ons.gov.uk)

Inflation Rate Forecast 2023/2024 (tradingeconomics.com)

Consumer price inflation, UK - Office for National Statistics

Producer price inflation, UK - Office for National Statistics (ons.gov.uk)

Producer Price Index News Release - 2023 M10 Results (bls.gov)