Business Costs for 2012 Expected to Rise, WSJ Says

The Wall Street Journal is predicting that the cost of doing business will rise again in 2012 and businesses might have difficulty passing along those increases to customers. That might be good news for the Federal Reserve, but it isn't good news for business, the Journal says.

"Within their monthly surveys, the Fed banks of New York and Philadelphia added special questions about cost expectations for 2012. Although each bank asked slightly different questions, the results were similar. Businesses expect to pay more for labor and supplies, but energy inflation should ease.

Employee benefits, especially health care coverage, are expected to be the biggest cost headache next year.

"New York respondents expect overall benefits, on average, to rise 6.1% next year. Philadelphia respondents see their health care benefits alone rising 7.3%.

"Wages are anticipated to rise 2.8% in New York state, and 2.1% around the City of Brotherly Love.

Energy costs are seen rising about 2.9% in New York and 1.8% in Philly. That’s a relief–or maybe wishful thinking–from the 2011 experience. Nationally, yearly energy inflation is running more than 10%.

"The question for the inflation outlook is how much of the higher costs will businesses be able to pass along to their customers. The evidence is sparse but suggests, not much. Only the New York Fed asked about expected selling prices. Respondents on average hope to raise their prices by just 1.8%.

"Of course, the lack of pricing power reflects the fact that consumers are still quite bargain-conscious. That in turn is the result of the small pay raises businesses have given out and–as the surveys show–plan to dole out again next year.

"Without more cash in their pockets, consumers will resist higher prices except for staples, such as food and energy. Consequently, the Fed can rest easy; inflation will not be a problem next year. The central bank can continue to focus on promoting economic growth.

"Most businesses will not be so lucky. Companies have been able to offset some of this year’s cost-price squeeze through higher productivity. But that trend looks played out. As a result, expect more downward pressure on profit margins in 2012." from the Wall Street Journal