Inflation could increase the cost of services later

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Much of the inflation we’ve seen recently is related to the rising cost of goods, such as groceries, furniture, and cars. So far though, we haven’t heard as much about inflation where consumers spend about two-thirds of their money: the service sector.

Services have been hit much harder by the pandemic and have taken longer to recover. But as the services sector recovers this year, we are likely to see more inflation there as well.

Al Fresko is a small market near San Diego that sells food and groceries that owner Jennifer Niezgoda curates around the world.

“We have olive oils from Portugal and wine from Mexico, and a lot of things from local makers here,” Niezgoda said.

Al Fresko also has a service business. It hosts events, like boutique gatherings at the market, private chef experiences, and luxury picnics on the beach.

“We’ve been able to offer a lot more community-style stuff, which is great because for a year and a half we haven’t been able to do that,” Niezgoda said.

Niezgoda said the products it sells are getting more and more expensive. But lately, she said costs are rising the most on the service side. A big reason is the cost of staffing these local events.

“I used to pay more around minimum wage, and what we have to pay now is quite high,” she said. “That’s well above minimum wage.”

It took a while for hourly service-sector jobs to start coming back, said Megan Greene, senior fellow at Harvard Kennedy School and chief economist at the Kroll Institute. Now that they are coming back, companies are competing for workers, driving up wages.

“And therefore, companies operating in these areas pass the higher labor costs on to the end user in the form of higher prices,” Greene said.

This doesn’t just happen in the leisure and hospitality industry.

“Child care has been hit hard,” said Marcia St. Hilaire-Finn, owner of Bright Start Early Care & Preschool, which has three locations in Washington, D.C. other things, or to just reevaluate their lives and what they want to do.

St. Hilaire-Finn said demand for child care surged this month, as the omicron disappeared and returned to work. But it has only been able to fill about 20% of its vacancies, in part because it is difficult to find the right people.

“We got a lot of people, but not everyone wants to be in daycare,” she said. “People are just looking for jobs. But for us, it must be a passion.

To attract workers, St. Hilaire-Finn said it was raising wages by 15%; it also spends more on workplace safety equipment, as well as staff pensions, to keep people coming back.

This means that its prices are also increasing.

“We had to raise tuition by 10%,” St. Hilaire-Finn said. “And we had to increase it again by 5% recently because it’s growing faster than we can keep up.”

It’s not just wages that drive up prices in the service sector.

Sherard Duvall runs video production company OTR Media Group in South Carolina. He does video shoots for clients all over the Southeast, which means Duvall has to rent lots of trucks and minivans to transport his crews and equipment.

“And man, vehicle rental prices have gone up so much,” Duvall said.

The same goes for the cost of hotel rooms. Although the costs of these services are increasing, they represent only a small part of its budget.

“When you look at the overall cost of production, it’s maybe one or two line items on a sheet that can have 30 to 40 line items,” Duvall said.

Many of these other line items don’t get more expensive. For example, he said his production budgets for food, gasoline, and wages have remained fairly constant.

As a result, Duvall said he hasn’t had to raise his prices all that much so far. “For example, I don’t think our customers got the same shock as I did when I looked at these car rental prices.”

But if hotel and rental car prices continue to rise, Duvall has also declared his will.

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