Colorado Springs businesses are facing an inflation squeeze that may not be immediately visible to everyday shoppers, but one local economist says the numbers tell a concerning story.
The Consumer Price Index for August showed that prices increased 3.4% over the past year, while the Producer Price Index — which measures prices for businesses — increased at a much higher rate of 5.4%. The gap between those two figures is at the heart of a growing economic concern.
While the average consumer is struggling with a 3.4% inflation rate and overall price levels that are about 25% higher than 2020, businesses are dealing with an even higher year-over-year inflation rate of 5.4%. The two-percentage-point difference between consumer and producer inflation rates is highly unusual. Going back to 2010, consumer and producer prices typically had annual inflation rates that were remarkably close — what producers pay generally gets passed on to consumers. What stands out today is that the difference between the two is nearly three times what it normally is.
Tatiana Bailey, executive director of the nonprofit Data-Driven Economic Strategies, wrote in a Gazette column that one key explanation for the divergence is that businesses are choosing to hold the line on consumer prices — at least for now. One possible explanation is that businesses are absorbing more of their rising costs rather than passing on those increases to consumers, with tariff costs and diesel gas costs for transport likely top of mind. Businesses try to absorb price increases in the short term to keep customers, and that can work for a while, but eventually it squeezes profit margins.
Businesses then face difficult choices: raise prices, cut costs, reduce hiring and investment, or accept lower profits — and lower business investment is even more likely given the Federal Reserve's recent interest rate hike and the expectation of at least two more hikes by the end of 2027.
The situation presents a difficult double bind for the broader economy. If businesses pass higher costs on, consumers face more inflation. If they absorb them, shrinking margins could mean less hiring and investment. Either way, persistent price pressures can squeeze both sides of the economy simultaneously.
Bailey identified two likely implications for the coming months: that unusually high producer prices will increasingly be passed on to consumers, worsening consumer inflation; and that as both consumers and producers buckle under price pressures, the economy could materially slow down, which will be felt more acutely by low-income consumers and smaller businesses with already tight margins.
Survey data support this outlook, with many U.S. businesses reporting high operating costs they no longer can absorb.
Whether area businesses will begin passing accumulated cost increases on to consumers — or how quickly tightening margins may affect local hiring — remains to be seen in the months ahead.