Inflation squeezing businesses

Passing higher costs on to consumers difficult

NEW YORK — Higher energy prices and borrowing costs make it more expensive than last year for Bill Savickas to operate his wholesale produce business, especially because it’s hard to pass the increases on to his customers.

“No one wants to be the first in the industry to raise rates and then look like the bad guy,” says Savickas, the owner of Tampa, Florida-based Yankee Produce Co.

While inflation overall has been tame the past few years, economists — including those on the Federal Reserve Board — forecast an acceleration in price increases this year. That’s going to put more pressure on small businesses that don’t have the big revenue cushions that larger companies do to help absorb costs. Smaller businesses also don’t have the negotiating power to get better prices from vendors. And many have been contending with rising costs, particularly for labor and energy.

Yankee Produce uses big trucks to haul and deliver the fruit, vegetables and other food it sells. But nationwide diesel prices are up an average of nearly 30 cents a gallon from a year ago, which makes filling up an average tractor-trailer nearly $100 more expensive than it was in early 2017. The difference comes out of profit.

“I’m taking home significantly less money on the same amount of sales as I had a year ago,” Savickas says.

He also is facing higher borrowing costs. The interest on his business line of credit was in the 6 percent range when the Fed was keeping rates stable, but now it’s between 7 percent and 7.5 percent. And after an increase last week, many economists expect the Fed to raise interest rates two more times this year.

“It’s changing by thousands,” Savickas says of his interest expenses. “That only comes from one place — my paycheck.”

Wholesale prices, those paid by companies, were up 2.8 percent in February compared with a year earlier, according to the Labor Department’s Producer Price Index, while consumer prices as measured by the Consumer Price Index were up 2.2 percent. The faster growth in wholesale prices is a sign companies generally haven’t been passing on costs, including rising labor costs, says Gus Faucher, chief economist with PNC Financial Services Group.

Wages and salaries are rising because of the tight labor market that forces employers to increase pay to attract and keep good workers. Minimum wage increases are also a factor; minimums are up in 18 states.

While many owners have been reluctant to raise prices for fear of alienating customers, they will be forced to do so to stay profitable, says Scott Anderson, chief economist of the Bank of the West.

“Inflation is a pressure that could hold back profitability for some small businesses that aren’t able to pass along the price increases,” Anderson says. But “more and more we are going to see small businesses having to pass along those higher costs.”

Trade issues, including the tariffs the Trump administration plans to impose on some steel and aluminum imports, also could hurt small businesses, Anderson says. Another factor is the dollar’s recent weakness against other currencies, which makes imports more expensive.