Small Businesses Vulnerable to Inflation

Joe Greco, president of the graphics design firm Joseph Ferruzzi Associates Inc., poses in his New York office Tuesday, May 23, 2006. Greco, shown with a poster his firm produced for Nascar, is concerned about the rising costs of printing and shipping. (AP Photo/Mark Lennihan) (Mark Lennihan - AP)

But a big consolation for Greco and many other owners is that their customers generally understand the situation, and don't gripe too much about the increases. "Most of our clients are saying, Joe, there's nothing you can do, and nothing we can do," he said.

Small businesses are particularly vulnerable to inflation because they lack the economy of scale of larger companies.

Brian Eberle said the rising cost of fuel is the biggest problem for his New York-based recycled office furniture business, Green Office Systems, forcing him to pass on delivery surcharges to customers.

"They completely understand it," he said of customers, and estimated that only about 2 percent of them complain about the added costs.

But there can be a flip side to that understanding _ many customers are taking longer to pay those higher bills. That eats into cash flow, and Greco said that means he sometimes needs to pay his bills with credit cards.

"I'm losing a lot of sleep _ I wake up thinking about it," Greco said.

While raising prices does make individual business owners nervous, particularly if they're in a highly competitive industry, economists say companies overall do have room to nudge their prices higher.

"The only thing that gives you pricing power is strong demand," said William Dunkelberg, chief economist with the National Federation of Independent Business, a Washington D.C.-based advocacy group. "Demand is strong, so you can raise your prices. You might lose a customer or two, but I don't know where they're going to go because everyone has the same price."

The recruiting business does well when the economy is stronger, Drum said, because executives command higher salaries and so recruiters' fees, which are a percentage of those salaries, go up. But if the economy slows and inflation rises, "we end up paying more for stuff and doing less business," he said.

The NFIB, which each month surveys the small businesses that comprise its membership, has reported an upward trend in the number of companies raising their prices or reporting plans to raise prices. In April, 26 percent of the respondents said they raised their prices, up 9 percentage points from March. Price increases were particularly prevalent in the construction industry, where a surge in raw materials costs prompted 45 percent of the surveyed companies to raise their prices.

Business owners naturally look to cut costs wherever they can in hopes of avoiding price increases. Drum said his company is cutting back on travel plans.

But there are limits to how much they can cut. As Greco put it, "we do what we can internally, but at what point does that change, because everything we buy is going up."

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