Consumers May Pay as Businesses Feel Pinch at Pump
Wednesday, August 9, 2006
As oil prices climb, the U.S. economy has become the arena for a tug of war over inflation.
On one end of the rope are business people such as Geri Gribben, a professional errand-runner in Woodbridge who handles such chores as delivering documents or waiting for the cable TV installer. She raised her hourly rate from $25 to $30 recently to cover the rising cost of filling her gas tank four times a week. Her customers swallowed the increase without complaint.
On the other end are people such as Michael Schick, vice president of Electrical Dynamics Inc., a contractor in Springfield. He's paying more for gasoline and products made from oil, but business is too competitive for him to raise prices. So he's cutting costs in other ways, such as sending workers out in smaller, more fuel-efficient trucks.
Until this spring, the Schicks were overpowering the Gribbens in the national economy, keeping inflation low even as oil prices more than doubled in three years.
But the balance is shifting. Inflation is up this year as oil trades above $70 a barrel, gasoline averages around $3 a gallon, and businesses use higher oil prices as a reason -- or an excuse -- to raise consumer prices for other items. The Federal Reserve has been raising interest rates to combat such inflation, though it decided not to yesterday after a string of 17 increases.
The question for many consumers and economists is whether the oil shock of 2006 will ignite sustained inflation that risks returning the nation -- at least in a limited way -- to the kind of psychology that pumped up prices during the 1970s and 1980s. Or will this round of inflation be a temporary uptick that recedes over time as competition forces businesses to operate more efficiently?
In theory, assuming oil prices level off, companies might have to raise prices only once to catch up. "But does it stop at that point?" said Nigel Gault, an economist specializing in North America at Global Insight Inc., a financial analysis firm.
The answer, he said, will depend on several factors: companies' power to raise prices, which reflects the strength of demand for their goods or services; the alternatives to their products; and the competitiveness of specific industries.
Gribben's Errands-on-the-Run, for example, has "pricing power" because competition is limited. Her service, even at a higher price, is an attractive convenience for many affluent Northern Virginia professionals willing to pay someone to handle tedious chores.
Gasoline prices have shot up 36 percent since the beginning of the year, Energy Department data show. Gribben hasn't calculated gasoline's share of her business costs, but she knew it was growing and that she'd have to raise prices. "I'm on the road all the time," logging as many as 100 miles in a workday, she said.
Though her business faces little competition, Gribben worried some clients would drop her service if she jacked prices too far. She boosted her rate $5 an hour, or 20 percent, and the customers stayed. "People have been understanding of my situation," she said.
Similarly, with the Washington area economy growing rapidly, local asphalt companies are so busy that they have a lot of pricing power. They will rarely bid on long-term commercial paving contracts unless they are granted "escalator clauses," allowing their prices to rise with oil prices, said Charles Hess, executive vice president of Hess Construction Co. of Gaithersburg, which manages local school construction projects.