Few Small Businesses Follow Consumer Price Hikes

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March 25, 2005 -- After months of absorbing higher energy, labor and raw materials costs, businesses finally increased prices last month.

The Consumer Price Index (CPI) rose 0.4% in February, its greatest climb in four months, reported the U.S. Department of Labor on Wednesday. The Core index, which measures all consumer goods except food and energy, thus making it less volatile, rose 0.3%, its sharpest increase since September.

Small businesses benefited from being able to increase their prices, but only minimally, said William Dunkelberg, chief economist at the Nation Federation of Independent Businesses (NFIB). According to the NFIB, 32% of small firms hiked prices in February, while only 10% slashed them. On a seasonally adjusted basis, the difference between hikers and slashers was 19%, a 2% increase from January and 6% above the 12-month low.

While more firms overall passed on higher costs to the consumer last month, a greater number experienced an increase in labor costs, offsetting gains from the higher prices. In February, 29% of small businesses surveyed by the NFIB reported paying more for labor, the highest level since January 2001.

The number of firms paying more for labor outpacing the number of firms raising prices indicates that firms are still getting squeezed, said Dunkelberg. "Someone isn't passing along costs, so profits are growing slowly," he said.

The Labor Department's report came one day after the Federal Reserve raised short-term rates .25% to 2.75%. The combination of higher interest rates and higher consumer prices could quell consumer spending, but Dunkelberg said it is unlikely because both jobs and wages have increased. In February, 262,000 jobs were created and the average weekly wage was 2.2% above the previous February.