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Small businesses up prices
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May 15, 2000: 4:23 p.m. ET
Small businesses are raising prices, paying more for workers, study finds
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NEW YORK (CNNfn) - One-quarter of all small businesses raised prices in April, one-third paid more for staff, while inflation is sneaking up on Main Street, a business group reported Monday, all of which adds to the pressure on the Federal Reserve to raise interest rates this week.
"If you focus exclusively on inflation indicators, this is the worst reading we've seen in a decade," said William C. Dunkelberg, a Temple University professor and chief economist for the National Federation of Independent Business.
The biggest factors were the end of price cutting and sharpened competition for workers, according to the NFIB's monthly report, "Small Business Economic Trends," which the Washington, D.C.-based group released on Monday -- a day before Federal Reserve policy makers meet to discuss interest rates. A one-half percentage point rate increase is widely expected.
Few are cutting prices
Two years ago, as many as one firm in six were cutting prices to customers, Dunkelberg said, but today only half as many are reducing their charges, tipping the scale in favor of the price raisers. Net of price-cutting, a seasonally adjusted 16 percent of firms reported raising prices.
 At the same time, 32 percent of employers reported higher labor compensation, a record level in the 25-year history of the NFIB report. Thirty-four percent said they had hard-to-fill job openings, and 23 percent of owners said that finding qualified labor -- skilled or unskilled -- is the biggest problem facing their companies. Both those numbers are records, as well.
Despite these factors, only 1 percent of surveyed respondents cited inflation as a business concern. And, although a net 24 percent reported paying higher interest rates on loans, only 4 percent cited rates or credit availability as a priority issue.
However, capital spending by small business continued at a healthy pace in April, raising hopes that productivity can continue to rise. "Plans, however, have fallen off quite a bit," Dunkelberg added, raising the threat of smaller productivity gains in the future that would act to offset higher prices.
Labor costs will impact profits
He predicted that unit labor costs would continue to rise, because companies already have made the investments that will pay off in the greatest efficiency gains. As the economy slows, unit costs will rise even faster, prompting more businesses to raise prices -- until competitive pressures quash sellers' pricing power and put pressure on profits.
How long will it take for these forces to play out? It all depends, said Dunkelberg, "If we get the soft-landing scenario, this could happen over quite a long period of time -- several quarters."
But if the Fed tightening shuts down consumer spending and triggers a recession, the impact could rebound through the small-business sector much more quickly, he added. 
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