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If the Federal Reserve is looking for signs of inflation, it need look no further than small companies. The National Federation of
Independent Business found in its April economic survey that a net 16% of businesses reported higher average selling prices. So far this
year, 12% of all companies report price hikes, up from an average of 5% in 1999 and 2% in 1998. That's good news for business owners,
right?
Not really, says the federation's chief economist, William C. Dunkelberg. Companies are raising prices because their costs are climbing
as well. Labor is their major cost, and a record 32% of businesses reported paying more for workers in April. The costs of borrowing
money -- witness the Fed's latest rate hike -- and of fuel are also rising.
The danger on the horizon, Dunkelberg points out, is that if the Fed succeeds in slowing the economy, sales will drop, while companies
will be paying just as much for labor. That adds up to higher unit labor costs. At first companies will raise prices to keep profits up,
but "competition puts a limit on that," he says. Companies may have to backtrack from current higher prices to keep customers coming
through the doors, and that would squeeze profits more. His advice to business owners: "Continue to manage costs. And take advantage of
capital spending to reduce dependency on labor."
By
Amey Stone
in New York
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