"The First Law of Inflation: Whatever goes up will go up some more." -- Anonymous
Mike Bailey knows that feeling. During his 29 years in the lawn-care business, he has battled crabgrass invasions and armies of garden pests. But in the past few weeks, he has faced an unfamiliar threat: soaring prices for the gasoline he needs to run seven trucks and 25 pieces of lawn equipment.
In fact, rising oil prices have hit his company's bottom line in another way as well. Bailey, president of Seneca Lawns Inc. of Darnestown, Md., uses large amounts of fertilizer and pest-control products, which are petroleum-based. The manufacturers of those products began raising their prices last fall, Bailey said, and he expects an additional 5 to 10 percent increase in the next six months.
Likewise, Robert Mignon, president of the Minuteman Press stores in Laurel and Beltsville, was recently notified by his suppliers that the price of paper would be going up by 3 to 5 percent. Then last week he learned that his electric bills are likely to increase by 15 to 20 percent in July.
Is inflation back? It seems that way to many business people and to individuals who find themselves paying higher prices for everything from ice cream to auto repairs.
Food prices surged in recent months, with milk, poultry, fish, meat and eggs responding to increases at the wholesale level. The trend is spreading. Kimberly-Clark Corp. recently raised prices on bathroom tissue, paper towels and paper napkins by 6 percent. The company said the increases were needed to offset inflation in raw materials and higher energy costs.
Whether prices will continue to rise, and by how much, is uncertain. During the recent recession, producers and manufacturers were generally unable to raise prices. And during the past five years, inflation averaged 2.4 percent. Current inflation forecasts range from 2.5 percent to 4.5 percent for this year and next.
Not surprisingly, the Federal Reserve has its own view of inflation. On May 5, the Fed declared that "inflation is low" and "long-term inflation expectations appear to be well contained." Because of that, the Fed said, any decision to raise interest rates could proceed at a "measured" pace.
The mere suggestion that the Fed will soon raise interest rates was enough to set off a new wave of home buying and a rash of mortgage refinancing, according to Jimmy Yerman, branch manager of the Sun Trust Mortgage Co. office in Timonium, Md. Although the average rate for a 30-year fixed-rate mortgage has moved up to 6.5 percent, Yerman said, people are rushing to refinance and close their house deals before rates go any higher.
As for inflation, Yerman confirmed what even casual observers know -- that house prices are soaring, citing the sale price of a home in Baltimore County: In two years, it went from $340,000 to $520,000, a 53 percent jump.
Between the Fed's view of inflation and the inflation experiences of many individuals there exists a perception gap, said Francis M. Kinniry Jr., principal at Vanguard's Investment Counseling and Research Group. Because people spend differently, he said, "individuals have their own personal inflation rates, which may not reflect the findings of the consumer price index."
Moreover, Kinniry said, although inflation was clocked at 1.9 percent in 2003, the cost of many important services was running at more than 5 percent inflation. Services include education and health care.
The rising costs of doing business have created challenges for both Bailey and Mignon. Bailey estimates that the cost of running his lawn business went up about 8 percent in the first half of the year, and he believes he will see another 8 percent increase during the second half. His gasoline bill alone has gone up 10 to 15 percent in the past three months.
Increased expenses, Bailey said, have left him no choice but to transfer some of those costs to customers. In the spring, he raised his prices for current customers by 1 percent -- and somewhat more for new clients. "I anticipate raising prices for clients by 2 to 3 percent if energy costs and product costs continue to rise," Bailey said.
Bailey has tried to reduce the amount of money his company spends for gasoline by developing more efficient schedules and routes for his crews. He also has been working to reduce what he calls "windshield time," the hours his crews spend sitting in traffic on the Beltway. "Windshield time," he said, "eats away at profits."
Bailey does not expect to see oil and gas prices go down anytime soon. "I see a real hit coming from the rise in energy costs in about three months," he said.
As for the printing business, Mignon is highly concerned about his utility bills.
Pepco, the largest electricity supplier in the Washington region, has warned residential customers that they can expect 15 percent overall increases in their electric bills after July 1. The higher prices will go into effect when the state's four-year cap on electricity rates expires.
Mignon said the electric bill for his two stores averages about $400 a month but can run twice that much in the summer when the air conditioning is running. A 15 to 20 percent increase would hurt, he said.
As an employer, Mignon copes with other types of inflation, especially in health care. He says he pays about 80 percent of the cost of health insurance for his eight employees but that the premiums go up by 15 to 20 percent a year.
A rise in interest rates will give Mignon an added business burden. His photocopiers, which are leased, usually must be replaced every three to five years. He pays interest on the lease payments and he expects those payments to rise.
Higher interest payments, he said, could become a key factor when he has to decide which type of new machines he can afford to lease. He may be forced to delay leasing some new machines or may not be able to obtain the models he wants.
One result of his rising expenses, Mignon said, is that "we are being very vigilant and we are not paying more for products than we have to. We are shopping around." Even so, he anticipates that he may soon have to raise his prices.
Mignon admits he doesn't know exactly what impact rising prices and higher interest rates will have on his business in the months to come. "What we will do," he said, "is try to react in the most favorable way we can for our customers."