Editor's note: This is the first installment of what will become a regular quarterly feature in Electrical Wholesaling. Over the years, the magazine has been well aware of the interest in and importance of analyzing product pricing from an historical perspective, through the "Electrical Price Index (EPI)" that appears regularly in EW's sister publication, Electrical Marketing newsletter.

We are delighted with the opportunity to offer our readers this Cost-Variance Index, which is published in cooperation with Trade Service Corp., San Diego, Calif. , a supplier of business information services. This is the same index that appeared in TED magazine for many years. If you have been tracking product prices over the years through the Cost-Variance Index in that publication, hang onto your old information. We will be providing the index in the same format.

The Electrical Marketing EPI will also continue to be published in its existing format. The main difference between the EPI and the Cost-Variance Index is that the EPI's data comes primarily from the Bureau of Labor Statistics and an analysis of that data is done by DRI McGraw-Hill Economics, Lexington, Mass. In contrast, Trade Service builds the Cost-Variance Index from pricing data it receives directly from manufacturers that contribute to its well-known pricing service.

The Cost-Variance Index (CVI) increased just 0.87% during the first quarter of 1998. This is the third-smallest first-quarter gain in the index's 20-year history despite government reports of a vigorous economy, low unemployment, low mortgage rates and high consumer confidence. The only time the first-quarter growth was lower was in 1988 and 1989, when there was actually a decline in the index of 2.22% and 0.87% respectively.

The index reflects the movement in the relative cost of the 18 commodity groups in a typical electrical distributor's inventory. Although the U.S. economy and corporate profits are strong, the construction market is healthy, consumer confidence robust and the number of price changes occurring within the electrical industry for the quarter is up 30%, the net result is less than a 1% increase to the index.

"Conduit fittings and boxes" (index weight 13.86%) posted the strongest first quarter figures, rising 4.22%. Of the 18 commodity groups, 12 posted gains, three were unchanged, and three declined in value, the most significant being the "Wire, cord and cable" commodity (index weight 17.91%) which represents the most heavily weighted portion of the index. The table below illustrates the first-quarter variances, the 12-month (April-to-April) variances, and the weighted percentage of the index commodities.

Using the Cost-Variance Index. Electrical distributors can use the Cost-Variance Index in several different ways. Several distributors interviewed for this article say they use the index as a benchmarking tool when evaluating year-end inventory, calculating LIFO (last in first out) reserves and as a measurement tool in evaluating their ability to negotiate with suppliers. Still others use the index to quote blanket orders to customers so they can figure out what may happen to the price of various commodity groups included in a blanket over a given time period.

Changes in the Cost-Variance Index reflect the shift in the inventory investment of a "typical" distributor. The figures for each quarter are obtained by reviewing the price movement of more than 27,000 electrical products. Each item is weighted according to its relative importance. This weighting was derived by obtaining actual inventories and on-hand quantities from several electrical distributors of varying size from across the U.S.

If a distributor's product mix does not conform to the "typical" distributor base that's provided here, reweight the commodity classifications to reflect a particular stocking pattern and then compare them to the index.

The forecast. The second and third quarters are normally quiet periods for price change activity. Given the low level of announced price changes on the horizon, 1998 should be no exception. This stability makes the CVI more vulnerable to swings in the global metals markets. Specifically, changes on the copper and zinc exchanges could be key factors. Copper has been trading around $ 0.75 per pound on the New York Mercantile Exchange. Copper prices have lost approximately $ 0.35 annually in both 1996 and 1997, and the Asian economic crisis continues to offset vigorous U.S. and European demand for these metals. What does this have to do with anything? Our best projection suggests the 1998 combined Cost-Variance Index will increase by 1% to 2%.

Table 2 shows the first-quarter variance over the past 22 years and compares it to the year-end variance.

Database activity. In the first quarter of 1998 there were 295,000 items updated in the overall electrical industry database maintained by Trade Service. An average of 22,692 items were updated each week in the period, which was at least double the ac.tivity in the three previous quarters. By comparison, the number of updated items in the first quarter of 1997 was 195,000. Currently, it's expected that the "lamps" commodity will a price change before mid-year.

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