Business Costs in 2011
Expect just a modest bump in inflation, given much slack in the economy.
With economic growth next year projected to be only slightly better than this year, businesses can plan on moderate price increases, and in some cases, decreases, for most products and services.
Join us for a look at what the editors of The Kiplinger Letter see happening with the cost of money, pay raises, energy, health care, insurance plus much more.
Inflation and profits
Expect just a modest bump in inflation, given much slack in the economy. Measuring Dec. over Dec., the Consumer Price Index should climb about 1.5% in 2011, vs. just under 1% this year. Wholesale prices will go up about 4%, on par with this year’s pace. Supplies of commodities are more than ample to meet demand.
Corporate profits will wane after posting a strong gain of 29% this year. Figure on an increase of about 8%, partly because firms plan to add more workers.
Figure on paying slightly more for energy overall next year as demand rises. Wide price swings seen this year are sure to continue as investors jump in and out of futures markets, though large supplies mean that price spikes will be short-lived.
Oil prices will average around $80 a barrel next year. Gasoline prices in 2011: About $2.85 a gallon, 10¢ more than this year, with a summer high of about $3, on average, also 10¢ higher than this year’s peak. Diesel prices are in for a modest increase, too -- on average of 15¢ a gallon over this year, to around $3.10. Summertime prices will peak at about $3.25.
Natural gas will go up only a bit because supplies are plentiful. For 2011, look for prices to edge up just 20¢ to around $4.90 per MMBtu. Heating oil is headed marginally higher as well. By February, the retail price will hit $3.10 a gallon vs. $2.85 now. $3.10 will also be the average for the year. Ditto, propane. With supplies remaining robust, prices will average about $2.35 a gallon in 2011, a dime more than this year. At peak in February, $2.40.
Relatively weak industrial demand will dampen electrical usage, so rates will average about 11.9¢ per kilowatt-hour, just 0.3¢ higher than in 2010.
Pay and benefits
Health care cost increases for employers will be about 8%-9% next year, compared with an average hike of 7% in 2010. As much as 20% of the rise will be due to the health care law enacted by Congress earlier this year. Most employers are planning to pass on some of the increases to their employees by raising deductibles, out-of-pocket maximums and copayment amounts.
Prescription drug cost hikes will be under 10% for the third straight year vs. a 20% increase a decade earlier. Greater use of generics makes a big difference.
Base salary increases will be up, about 2%-2.5%, vs. an average hike of 1.5% in 2010. Top performers will do best as employers offer more cash incentives to stop them from jumping ship. More and more firms will also use stock options to keep key executives on board -- popular because a vesting period is usually required. Many firms are restoring pay cuts made during the depths of the recession, though, again, some employers are limiting the restorations to their star performers.
Travel and accomodations
Passenger airfares will see a bigger jump in 2011. Overall increases of as much as 12%, on the heels of an 8%-10% in 2010. Plan on shelling out more for baggage, extra legroom, blankets and more as airlines continue to add fees. Furthermore, airlines are less likely now to negotiate the fees away in corporate contracts. International fares will rise, too, but not as dramatically -- 5% or so over 2010.
Corporate travel managers can expect tougher negotiating by hotels. They’re keen on recapturing the ground they lost over the past 18 months or so when travel was down. In fact, mid-tier hotels, which drew more corporate clients as firms economized during the recession, will drive some of the hardest bargains. Flat rates will give way to increases of 3%-5%, highest in the largest cities. Note, too, that car rental firms will start charging for no-show clients who don’t cancel reservations. That’s on top of a 2% overall rate hike. Restaurant prices will edge up just a bit. Figure on paying 2% more for meals.
For technology, both hardware and services, prices are falling fast. Personal computers will be down as much as 10%. Servers,10%. Hard drives, 25%. Printers, 5%. What’s more, new items, including tablet computers, come with more power and applications than equipment being replaced. Also telecom prices, including the cost of cell phone service, will drop 5%-10%.
Commercial real estate
Office rent declines are about at an end. Still, there's plenty of time to dicker. Empty offices can be found everywhere. Companies confident of their future should consider locking in now for five years.
Look for freight transportation costs to inch up, roughly in tandem with modest fuel price increases. Fierce competition among trucking companies will also help to keep a lid on prices through next year. There’s a lot of idled capacity. Truck rates will go up 3%. Rail freight rates will rise about 5%. Air cargo, 2% higher.
Insurance and representation
There’s mostly relief ahead for buyers of commercial insurance.A lot of competition in the weak economy makes it hard for insurers to raise rates. Commercial property and general liability insurance will fall 2% through the first half of next year, at least. Workers’ compensation insurance will decrease as much as 4%, except in California and New York, where workers’ comp rates are poised to rise.
But directors and officers insurance rates are headed up for most firms. Financial services firms face the biggest jump. For them, the cost of D&O insurance will climb 10%-12% in light of bank failures and more policing by regulators.
Most legal firms will keep prices flat. They want to keep good customers. Don’t hesitate to seek pricing info -- it signals that you’re watching costs carefully.
Advertising will remain a buyer’s market. Although prices are firming, they’ll rise only 3%-5% on average across all advertising media. Network TV spots up 3%-4% over 2010. Newspaper ads will be flat, after several years of declining rates. Messages placed on search engines and in Web videos are stable or rising slightly. Prices for ads in video games and on mobile platforms could go up as much as 10%.