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Friday, Mar 29, 2024

Businesses Face Pressures From Inflation Trend

It’s been hard to miss the tug of war that’s been going on between the Fed as it tries to slow the rate of inflation, and the Street, which is worried about the consequences of higher interest rates for business growth. But closer to home, another tug of war has been underway in the business community whether or not to pass along rising costs in price increases. Whether it is the cost of making goods, packaging them or transporting them, costs have crept up for many businesses over the past year, largely as a result of higher energy and oil prices. After holding out for some months, some are now moving to raise their own prices. Others, worried about global competition, are still hoping to hold the line. But the inflationary pressures that nearly all business have felt in the last 12 months are not likely to go away anytime soon, experts say. “Inflationary pressures are continuing and they probably will rise,” said Dan Blake, economics professor at California State University Northridge and director of the San Fernando Valley Economic Research Center. “Grocery stores have to deliver the goods, and the heating and air conditioning guy has to come out to your house, and it starts putting pressure on when you’re paying 50 percent more than you used to. So the business people seeing that are starting to pass on those costs, and that’s going to cause this inflationary pressure to rise.” In a survey of small business owners conducted by SurePayroll in June, two-thirds of respondents said they thought inflation would negatively impact their business in 2006. The Consumer Price Index, a major indicator of inflationary trends, has been moving upward for some time. By last month, the index adjusted for urban areas had risen to 4.2 percent, nearly double the year-ago figure of 2.8 percent nationally. But things are far more dramatic in Los Angeles, where the Urban CPI registered at 5.4 percent in May, compared to 4.2 percent for the year earlier period, according to the SFVERC data. Culprits like gas and housing take a lot of the responsibility for those hikes. But the issues they raise go well beyond whether consumers will have enough disposable income left over when they finish paying for gas at current prices. “We have our heaters that are generated by electricity, and our booths are generated by electricity,” said Chris Bement, president and CEO of Sherman Oaks-based Earl Scheib Co., referring to the work stations at the company’s 170 collision repair shops. “But our bigger cost increase is petroleum-based product. Whether it’s polyurethane or the actual resin, we figure that since January, it’s probably gone up around 12 percent to 13 percent.” So far at least, Earl Scheib has no plans to raise its prices, although Bement said that the company will discontinue some of the discount programs it has run in the past. At Remo in Santa Clarita, prices are slated to increase, and officials note that the move is probably overdue. “Inflation’s already bitten us,” said Doug Sink, CFO for the drum manufacturer. “Our raw materials are petroleum based. DuPont has increased our prices three or four times since last fall. Recycled aluminum, that’s gone up. You’re seeing surcharges on deliveries. We’re doing a price increase August 1. We can’t subsidize our customers any more than our suppliers can subsidize us. That’s the spiraling effect of inflation, so I think it’s very real and it’s here now.” With oil prices rising above $72 a barrel as of last week, and demand increasing from China, it is not likely that the price increases for petroleum and other oil-based products will abate anytime soon. But when the Fed met and hiked interest rates another 25 basis points last week, it was worried about more than the price of gas. Some price increases haven’t really shown up yet in the statistics. Among the big question marks are what will happen to home prices and home buying, and whether wages will begin creeping up. “The Fed’s big scare is that firms and individual workers will say prices keep going up so I need my wages to go up,” said Ryan Ratcliff, economist at University of California at Los Angeles Anderson Forecast. “The firm says I have a higher wage bill, I have to raise prices.” The Fed hopes that by raising interest rates, it can slow down economic growth and keep the spiral in check, but, especially in California, wage pressure is coming from forces that have little to do with inflation. With unemployment levels so low, economists say that wages are likely to rise by virtue of market forces alone. “I don’t think the inflation scenario is going to change through the rest of the year,” said Ratcliff. “The Fed isn’t going to catch a break that inflation is going to go away.” Businesses are not likely to catch any breaks anytime soon either, and indeed things could get worse. With sales strong at many Valley companies, the price increases have not yet had an overall effect on business, even though profit margins have grown thinner. “Things are okay,” said James L. Robinson, president and CEO of The Hip Hop Beverage Co. in Pacoima. “But three-quarters of our business is shipping and receiving, and so that’s very much affecting the bottom line.” But as the economy slows, whether due to the Fed’s efforts or the housing market, the combination of slower sales and higher costs will likely take a bigger bite out of these businesses. “We believe it is manageable because from a business standpoint this is a good year on the revenue side,” said Rick Pocrass, CEO at Chocolates a la Carte Inc. in Valencia. “But it is a challenge to make our profit objectives. If we started on the recessionary side, and you threw this on top of it, the issues would be much greater.”

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