Cheaper Oil May Not Mean Lower Prices

09/08/2008 12:00 am EST

Focus: MARKETS

Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

Knight Kiplinger, editor-in-chief of the Kiplinger Letter, says some price increases for next year are already baked in to the economy. 

Despite lower overall inflation rate next year, keeping business budgets in check won’t get a lot easier.

The Consumer Price Index should climb by only about 2.5% in 2009, compared with the 4.5% increase likely this year. Figure wholesale prices will run a parallel course, rising at a rate that’s only about half of this year’s 8% wholesale inflation pace.

Still, producer prices, which are heavily influenced by the cost of raw commodities, will continue increasing about twice as fast as consumer price inflation. As a result, corporate profits will continue to be squeezed. They’ll make up the ground that was lost this year, but are still going to lag behind the record profits of 2006.

It will help that energy prices shouldn’t repeat this year’s performance. The speculative froth that whipped oil prices to nearly $150 a barrel has subsided. Plus, slower world economic gains and reduced consumer demand in the face of record prices will allow the supply cushion to expand modestly next year.

We expect oil prices to average near $100 a barrel next year, after falling to around $110 at the end of 2008. This year’s average: $115 a barrel.                 

Average 2009 gasoline prices: 20¢ or so per gallon less than this year, with a summertime peak of about $3.75. That’s 36¢ lower than this year’s peak.

Natural gas won’t cost as much, either: for 2009 as a whole, we anticipate users paying about 75¢ per MMBtu less than this year.                 

A similar pattern for heating oil: come next year, prices should average out at about 15¢ a gallon less than the $4.05 a gallon we anticipate for the 2008 average.

But the somewhat easier energy picture won’t dampen price hikes elsewhere. In fact, costs for many other products and services will rise more sharply next year as the steep increases in fuel prices this year work their way through the economy.

Transportation and freight charges will continue to mount, with companies seeking to build their persistently high fuel expenses into their rate structures.

Soaring airfares mean higher costs for business travel next year as well. The average fare may climb 8%, following a jump of the same magnitude this year. And that doesn’t include fuel surcharges, checked luggage, and other fees tacked on.

Most firms won’t boost their travel budgets, though, opting to stretch dollars by insisting on more frugality: limiting extra baggage, flying economy class, and so on.

Employers will also try to keep a tight rein on wage increases next year. Average base pay hike: 3.7%, less than the cost of living will rise in 2008.

Holding down health care costs will be tougher. Insurance premiums are headed for another 8% jump in 2009.

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