Inflation and Small Business.

Inflation. Congress and government analysts tell us repeatedly that there is no inflation. The Fed is keeping interest rates really low to make sure we have no inflation. Well, guess what?

We’ve had an 8 percent increase in the cost of eggs over the past year. What do you think that is doing to restaurants and bakeries? Cotton’s up 14 percent in the last year. How do you think that impacts clothing manufacturers and retailers? And any business that sends somebody on a sales trip is bearing the brunt of an 18 percent increase in jet fuel or a 27 percent rise in in the price of gasoline.

Under “normal” circumstances, small businesses simply pass these costs along to consumers. You might not have noticed, but we have not had “normal” circumstances since 2007. Consumers want to pay less, not more for stuff, and small businesses are left with few if any options.

Most small businesses have seen travel costs rise 30 percent in the past year, after a 20 percent gain the year before. Rising fares, baggage fees and higher hotel bills are to blame. Large companies have leveraged travel budgets and deals with airlines, hotels and rental car agencies to help with the increased fees, while small business does not. It is almost as if the travel and hospitality industries have had a private peek at a coming Armageddon, and have jacked their prices so that they can get it all in now.

Many small businesses are doing sales training and company meetings through online seminars rather than in person.

The kind of numbers that small business deals with may surprise anyone who believes that the government’s Consumer Price Index tells the story of inflation. In the 12 months that ended in March 2012, the CPI rose 2.7 percent. Subtract food and gas as some economists do, and what’s left is called “core” inflation. It rose 2.3 percent. That’s close to the target of 2 percent set by the Federal Reserve, which sets monetary policy so inflation doesn’t get out of hand.

But prices that businesses pay for energy, raw materials, supplies and services have gone up much more sharply. And they’re expected to keep rising because demand for many goods and services is soaring in countries like China and India. That offsets slower demand in the U.S. and Europe and sends prices higher worldwide.

Raymond Keating, chief economist with the Small Business & Entrepreneurship Council, an advocacy group, expects inflation to keep rising as the economy improves and the Fed eventually lets short-term interest rates rise from their current levels near zero. He says of small-business owners, “a lot of people are worried about how high it (inflation) will go in the future.”

The impact of rising energy prices may not always be obvious. Regalia noted that airlines’ baggage fees, typically $25 per bag per flight, are the result of rising fuel prices. And energy costs factor into the prices of all goods and services.

Chad Moutray, chief economist with the National Association of Manufacturers, says small businesses are at a disadvantage because they can’t buy in bulk like larger companies can. That means a small cosmetics manufacturer can’t negotiate the lower prices that a company like Revlon can. And, he said, “They’re less likely to be able to pass along their higher prices to customers.”

Lorne Campbell, president of Occasionally Cake, two upscale bake shops outside of Washington, D.C., has refrained from raising prices since his company was launched in 2009. “A small business is about personal relationships. It’s about trust,” he says. “A large faceless corporation doesn’t have to look at their customers and say, Mrs. Smith, you and your daughter are going to have to pay extra for a cupcake today.”

Campbell estimates that he’s paying 10 percent to 12 percent more for ingredients and other supplies than he did a year ago. His fuel costs have doubled, although some of that increase is due to the fact he’s making more deliveries. Occasionally Cake has kept other costs down by holding back on hiring, and asking current staffers to take on more responsibilities and work longer hours. Sound familiar?

Other businesses can’t raise prices because they’re under contract to deliver goods or services at a set price. Campus Cooks, which provides dining services for fraternity and sorority houses in the Midwest, Florida and Texas, signs agreements that cover the entire school year. When wholesale food prices rise sharply when school’s in session, it’s time to get creative. “If chicken’s higher, you change the menu to more fish, pork and beef,” says Bill Reeder, president of the Glenview, Ill.-based Company. Campus Cooks will also buy in bulk. And if it has to serve, say, more pork, it will vary how the meat is prepared.

Reeder already expects his prices to rise 2 percent to 3 percent for the next academic year. But he’s not passing all the costs along. “We’re taking some of a hit on the profit end of it,” he says. He’s hoping to get another 10 to 12 customers signed for the next year, and the additional sales volume would help his profits.

Clothing stores are contending with higher prices — and consumers’ tendency to be frugal when they’re paying more for gas, food and other items. Jimmy Au’s, a Beverly Hills, Calif., men’s store, has paid on average 5 percent more for the clothes it stocked during the past year.

Alan Au, the store’s client relations manager, says prices for cotton, wool and silk have soared. Top-grade cotton has gone up as much as 14 percent over the past year. Au says the store laid off a sales person as demand fell, and that allowed it to keep most of its prices unchanged. It has raised prices on some high-end suits and on jeans that sell for $200. But for the most part, the store is telling customers, “We’ll bite the bullet for you because we appreciate your sticking with us.”

And there are thousands of other similar stories all across the US, but Martin Regalia, chief economist with the U.S. Chamber of Commerce, has only this response: “While overall inflation is not a real problem, the components of inflation that matter the most to small businesses — such as energy — are troubling.” Not a real problem? The “components” of inflation? Troubling? 

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About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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