Economic Forecasts

Business Cost Outlooks for 2012: Nine Key Sectors

Businesses budgeting for 2012 should plan to spend roughly the same or a bit more for the products and services they use -- with a few exceptions.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.

by: Kiplinger Team

January 1, 2012

Businesses budgeting for 2012 should plan to spend roughly the same or a bit more for the products and services they use -- with a few exceptions.

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.

The slide show begins with the navigation bar below.

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The Cost of Money

With so much slack in the economy, inflation will ease in 2012. Measuring December over December, the Consumer Price Index will increase 2% or so, vs. 3% this year. Wholesale prices for finished goods will go up around 3%, following a 6% hike in 2011. And there are plenty of commodities to meet demand.

The cost of borrowing money will stay cheap -- for those who can borrow. The Federal Reserve’s pledge to keep short-term interest rates near zero means a bank prime rate of 3.25%. Still, many banks are sticking high hurdles in front of borrowers.

Subpar growth will also keep a lid on long-term rates. The 10-year Treasury note will creep from 2% to 3% by December 2012.

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Energy Costs Moving Down, Then Up

Oil will start the year at $80 to $85 a barrel, then threaten $95 by June, though political upheavals in key oil-producing regions are sure to bring spikes. As the Libyan conflict showed, even small supply disruptions can send prices soaring above $100.

Gasoline prices at the pump will peak at $3.50 a gallon, on average, during next summer’s driving season, vs. this year’s high mark of $3.97 in May. Any disruption worries could lead to a spike to $4.00, though.

Diesel will top out at $3.80 in June and July, also well below the 2011 peak of $4.12.

Natural gas prices will range between $4.10 per million British thermal units and $4.50 per MMBtu in the winter, thanks to ample supplies. A hot summer in 2012 could send them as high as $4.75 per MMBtu, but that would be tops.

Heating oil will average around $3.45 a gallon for the year, with the highest spikes coming this winter and then again later in the year. Propane’s cost will be muted, too, with an average of $2.70, though fairly thin supplies will push up prices during the coming winter months to about $3 a gallon.

Electricity will stay as-is, thanks to fairly weak demand. Electric rates will average 10.2¢ per kilowatt-hour next year, vs. 10¢ now. Fairly weak demand should head off stronger rate increases.

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Pay and Benefits: Adding Sticks to the Carrots

Base salary increases will average 3%, a tad above this year’s average. The modest hike continues to reflect employers’ concerns about the need to hold down expenses. Incentives such as bonuses and stock options for top performers in lieu of big raises are here to stay, though employers won’t shy away from raises when times get better.

Employers face a 7% hike in health care costs, about the same as this year’s gain. Increases for smaller firms, however, will be double that. Both large and small employers will find ways to share costs more broadly with workers, including hiking premiums.

Employees wishing to receive incentives for staying healthy will have to show results, not just prove that they’ve enrolled in smoke-ending, weight loss or other programs.

Prescription drug cost increases will be under 10% for the third straight year. Note that some employers will exclude popular brand-name drugs from their coverage in favor of generic equivalents. Others will step up incentives for buying generics.

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Mixed Bag on Insurance

General liability and business income insurance will be up about 2%, with terms and conditions sure to be stiffer for many firms as insurers try to boost revenue. But directors and officers insurance rates are headed down as demand falls for the first time since 2009. And workers’ compensation insurance will stay flat, or even fall slightly, on average. Remember that premiums vary greatly by state and could go up in several states.

Because of big losses from this year’s many storms plus increased demand, commercial property and auto insurance premiums will rise as much as 5%. Competition and overcapacity have been driving rates mostly down since 2008.

Also, most legal firms will keep prices flat, or even drop them a bit, to maintain good relations with clients in a down economy. It’s worth asking for discounts and even free legal advice on some matters.

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Spending on Sending

Shipping costs will keep rising in 2012, even with modest GDP growth. Trucking rates will climb 6%, and possibly higher, following a 6.3% jump this year. Higher costs are being driven largely by the dearth of highly qualified truck drivers.

Rail freight rates will rise 5% or so, as firms keep moving more cargo from trucks to rail. Air cargo will be 3% more expensive than in 2011, assuming that jet fuel prices remain stable.

No break for business mailers: Postal rates at the long-suffering United States Postal Service are on the march again. An increase of up to 4% is a good bet for all types of business mail, including catalogs, magazines and bulk mail. The cost of sending overnight packages will rise 5% to 6%.

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Technology Marches On, Prices Don’t

Tech and telecom will continue to see price drops. Expect to pay about 15% less for a PC; 10% less for a server. Even hot-selling tablet computers will be discounted by as much as $100 or so.

Cell phone charges will stay tame, unless you frequently download large files or use a lot of video. Most major providers are switching to tiered pricing plans, charging heavy users more than casual users, who’ll see prices drop 5% to 10%.

We see little change in prices for printers, copiers or IT gear and services.

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Getting There and Staying There

Look for the combination of base fares and ancillary fees for everything from seats with more legroom to blankets to send the cost of flying up as much as 6%. There will be fewer of those pricier flights -- and they’ll be more crowded to boot as airlines cut back on capacity.

Hotels intend to tack on more fees and surcharges and take a harder line with firms in negotiations over corporate rates. For example, they’ll be less willing to throw in free use of fitness facilities and other amenities for business travelers.

But meal costs will rise only about 2%, because restaurants don’t want to drive off business.

The cost of convention space will stay flat, with good deals available if you’re flexible. No rise, either, for corporate car rental fees as competition keeps rates in check.

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The Roof Above Your Head(s)

Figure on a 2.5% increase in rent for topflight office space, matching this year’s increase (and following a drop of 4.5% in 2010). There’s just enough job growth to lower vacancies. Also, a dearth of new construction is helping to increase the use of existing space.

Warehouse rents will nudge up 2% or so, after not moving much this year. As with offices, there’s little new construction because inventories remain lean in the face of weak growth.

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Making Yourself Heard and Known

The race for the White House will help boost advertising rates, especially on television, where they’ll climb 5%. Magazines and online ad prices will rise about 3%; newspapers will stay flat. Also stable or dipping slightly: ads on mobile platforms, thanks to an increase in supply.