The electrical-goods cost-variance index (CVI) decreased 0.73% in the first quarter of 1999 (see table on page 28), the first negative first quarter since 1989. The CVI reflects the movement in the relative cost of the 18 commodity groups in a typical electrical distributor's inventory.

The first quarter's overall drop is contrary to changing economic indicators that suggest the cost of goods will be on the rise through the year. Four commodity groups finished unchanged, while ten increased in value. Conduit Fittings & Boxes (index weight 14.5%) posted the strongest first-quarter figures, based on dollar value, rising 1.16%. This is followed in order by Connectors, Lugs, etc. (index weight 5.9%) rising 2.68% and Fuses (index weight 3.9%) rising 2.25%.

The Wire, Cord & Cable commodity (index weight 16.5%) had the largest impact on the quarter as its value dropped 7.12%. If we factored out Wire, Cord & Cable the index would have finished the quarter up 0.064%. This commodity group continues to track closely with the fluctuations in the cost of copper.

Through the first quarter, the spot copper price has dropped 6.25%, down to $0.6220 a pound as of March 31, 1999. Just two years ago copper traded at $1.1455 a pound. Bargin copper prices, steady housing construction growth, high employment and consumer confidence should further slow the slipping copper price and may actually stablize it as we reach the third or fourth quarter.

The Forecast: The second and third quarters should be affected by a developing mild inflationary trend. Currently, we expect that the Conduit & Raceways, Wiring Devices, and the Conduit Fittings, Boxes commodity groups will experience a price change before mid-year. Asia, specifically Japan, seems to have solved its banking crisis. This in turn may mitigate domestic inflation and help keep consumer confidence high and demand for housing on its steady growth track. Our best projection suggests the 1999 combined cost variance index will increase 2.5% by year's end.

Wholesaler use of CVI: There are many practical applications of the Cost-Variance Index for electrical distributors. Readers report using the index as a benchmarking tool when evaluating year-end inventory. Another use is for calculating LIFO (last in first out) reserves. One national distributor chain has incorporated it as a measurement tool in evaluating its ability to negotiate with suppliers. Still others use the CVI to quote blankets to customers in order to figure out what may happen to the price of various commodity groups over a given time period.

The Cost-Variance Index change reflects the shift in the inventory investment of a "typical" electrical 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 an electrical distributor's product mix does not conform to the "typical" distributor base that has been provided, the commodity classifications can be reweighted to reflect a particular stocking pattern and then compared against the CVI.

The table above shows first-quarter variance over the past 23 years and compares it to the year-end variance.

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