Business Costs in 2014

Every year The Kiplinger Letter takes a wide-ranging look at business costs for the year ahead and how they'll affect the bottom line. Broadly speaking, we see most firms doing slightly better in 2014, with demand rising as the economy picks up a bit more steam.

There won't be much sting from inflation at about 2.25% next year for both the retail and wholesale levels. That’s just a smidge higher than this year. There’s still plenty of residual slack in the economy, both in terms of unused production capacity and labor. Though it will head lower through 2014, the unemployment rate probably won’t dip much below 7%. Moreover, there’s no sign of price pressures building further back in the pipeline. Modest global economic growth will constrain commodity prices. And with the U.S. producing more of its own fuels, the risk of importing inflation along with needed crude oil has diminished somewhat.

Count on some costs to increase faster than general inflation, however. Starting with health care, as usual. In 2014, employers will pony up 6% more on average than they did this year to provide health insurance for their workers. But that takes into account changes employers will make to pare an increase that otherwise would be closer to 10%...at least partly due to the Affordable Care Act. For prescription drugs, also a 6% hike, with costs likely to climb even faster in 2015 as the number and use of high-priced specialty drugs continue to mount.

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Average pay hikes: A bit more than 3%, spread pretty evenly over industries and positions, clerical to executive. Two notable exceptions: The oil & gas industries will have to offer bigger pay bumps, and government workers will get smaller raises. Payroll taxes will rise as the wage base goes from $113,700 to about $116,400. Firms that pay pension premiums to Uncle Sam will see a hefty 2014 increase: 17% for plans paying flat rates, rising to $49 from $42 per plan participant in 2013. And a steep jump in variable rate premiums for underfunded plans, rising from $9 to $13 per $1,000 of unfunded vested benefits (subject to a $400-per-participant cap).

Money will also cost more next year. The odds are that the Federal Reserve won’t bump up short-term rates in 2014. And even when it does, it will do so at a slow creep. But look for long-term rates to climb by about one percentage point over the year.

Plan on paying an additional 5% to 10% for property and casualty insurance. In a newly designated floodplain or been flooded before? Rates could climb by 25%. Premiums on business interruption and cybersecurity insurance won’t rise as swiftly: 3% to 5% or so. Insurance for directors and officers will climb again next year, but not as fast as this year with a 7% to 9% hike, compared with a 12% jump in 2013.

Accounting and auditing will cost many businesses more to meet new regs and beefed-up accounting standards in the coming year, but there will be little change for legal services. Rents for top-flight office space will rise by close to 3%, as economic growth slowly absorbs excess space. Maybe a bit less for rental rates on warehouse space. Bargain rents on retail space are drying up, with average rents up a bit over 2% in 2014. To maintain 2013 travel and entertainment levels, budget about 4% more. Though airfares will climb by just 2% or so, higher add-on fees will jack up costs. Strong demand and tight supply will drive up hotel room rates by 5% on average. Car rental rates are going up 4%-5%. Restaurant meals will be a relative bargain, up only 2.5%.

One pleasant budgeting surprise: little change in most energy costs. Crude oil price will average about $95 a barrel in 2014, same as this year and the previous two. Global demand will perk up, but supply growth will keep pace. Of course, violence in the Middle East, an ever-present risk, would lead to a spike. Gasoline will range from $3.45 to $3.70 (national average for for a gallon of regular unleaded). That's no more than 10¢-15¢ a gallon higher or lower than this year. We see diesel averaging between $3.85 and $4.10 a gallon, in the same ballpark as prices this year, barring a Mideast conflagration. Heating oil will trade in a similar range. Natural gas will be modestly higher next year, with the wellhead price likely to average $3.90 per million Btu, give or take a dime. That’s a 4%-5% hike from 2013. Electricity will be a teeny bit higher on average, 10.1¢ to 10.2¢ per kilowatt-hour, up from just under 10¢ this year. Blame pricier natural gas for that.

Plan for higher trucking rates next year. With both trucks and drivers in short supply, even a moderate economic uptick spells increased costs. And a host of new regs from Uncle Sam will further add to costs. Expect to pay 3%-5% more. But rail freight will see slower gains, on the order of 2% to 3%, on average. After several years of sharper hikes, the industry is wary of triggering more scrutiny of its charges by federal regulators and so will aim for only moderate increases. And ocean shipping figures to remain flat. Lots of new ships in service means cost pressures will remain well contained in 2014, and likely beyond, too.

Higher mailing and delivery costs will sting. Count on a 5%-6% increase in overnight delivery charges from UPS, FedEx and the like plus a more modest hike for slower service. The U.S. Postal Service will hold the line on package delivery, but look for an increase of 4% to 7% on most mail. This year, USPS will succeed in convincing the Postal Regulatory Commission that it has no other options to help balance its budget. USPS wants to slap catalogs, promotional material and periodicals with a stiff 7% hike and minimize the hit to other mail services. But the commission may not allow that, requiring a 4% increase on everything but packages. Either way, a first-class stamp will likely cost at least one penny more, maybe two.

All manner of computers — desktops, laptops and tablets — will continue to get cheaper in 2014. Brand-new networking gear such as routers, switchers and servers will be priced about the same as this year. And look for lots of terrific bargains on three- or four-year-old used equipment — easily powerful enough to meet the needs of many businesses.

Also, more-modest fees for cloud computing will make it an economical choice for lots of small businesses. Charges for Internet and phone service, both landline and cell, will be about flat. Not much of a bump in advertising costs next year. Television advertisers can expect to see rates climb by 3%, with demand pumped up by the 2014 elections. Still, nothing like the sky-high premiums even small stations could command during the advertising frenzy of the 2012 presidential race. No change for radio rates. Online ad rates: Up 3% from 2013 to 2014, and about half that increase for mobile ads. Though growing fast, they’re still a relatively new market segment. A buyer’s market for print ads, though still pricey, compared with digital.