kiplinger connection
The Economy • Small Business • World Business

The Economy: Inflation is under control—for now.
Small Business: Tired of paying lawyers to interpret federal regs?
World Business: India is the new China—a mega-power.

The Economy
Good news and bad news on inflation: It won’t spiral out of control, despite the energy-led run-up seen through May. The downward shift in motor fuel prices starting this month will have a ripple effect,
lowering transportation and other costs.

Still, inflation will remain a problem as price pressures bubble below the surface.
It means interest rates won't fall anytime soon. The jump in long-term rates seen in the past few weeks is going to stick.
But rates won't go much higher, either. Look for the Federal Reserve to stand pat, keeping short-term rates steady through 2007.
Several factors are fueling inflation.
Strong global economic growth, for one, in most of Asia, Europe, and Latin America, is straining world supplies of energy, metals, tires, and other items used by businesses.
The weak dollar is adding to inflation as U.S. companies pay more for imported goods priced in other currencies. Few foreign firms are willing to take a hit to profits to preserve U.S. market share. So U.S. customers will pay more for steel, softwood lumber, and other products in short supply in the U.S.
Slowing productivity growth is keeping Fed officials up at night. Add to that a tight labor market, with the unemployment rate topping out at a still low 5% by year end. Wage gains will maintain their fast pace.
Rents, which account for one-third of the Consumer Price Index, will reverse their recent easing as potential home buyers are discouraged by higher mortgage rates. That will add upward pressure on the CPI.
And the widening drought, which is bumping up food prices.

Many firms can't easily pass on higher costs to consumers, who are growing more price conscious even as gasoline prices moderate.
So some price growth will really play out as slower profit gains, helping to limit the pace of increase in consumer price inflation.
Net: Look for inflation to roughly match last year's 2.5%.

Meanwhile, high interest rates will deepen housing's woes and all but ensure that the sector's slump will extend well into 2008. Higher long-term rates will hike mortgage rates, further sapping demand, and hurt homeowners who are trying to escape floating rate mortgages.
That gives Fed policymakers a good reason not to raise rates, even though inflation remains out of the central bank's comfort zone.

Small Business
Tired of paying lawyers to interpret federal regulations? A new law will help. It turns up the heat on federal agencies that routinely ignore a 1996 law requiring rules to be accompanied by clear guidance, forcing smalls to hire lawyers to interpret rules. The new law makes regulators appear before Congress once a year to produce and defend the guidance they provide to small companies. Lawmakers won’t be in the mood to accept any excuses from agencies.

Small public firms had better get serious about Sarbanes-Oxley, the 2002 corporate governance law passed after the Enron scandal.
Regulators won’t agree to more delays in compliance by smalls, which have had several extra years to begin implementing new audit rules.
Tougher audit requirements will start phasing in next year, despite additional pleas from business groups that more time is needed.

Among hot franchise trends: Fast food geared to ethnic tastes. Skin care and other cosmetics that are tailored to aging baby boomers. And stores that take in a variety of items and sell them online for you.

World Business
Is India the new China...the next big global mover and shaker?
India’s headed in that direction, but it’s sure to take decades for that nation to supplant China in terms of both the impact China has
on the world economy and the market it represents for U.S. companies.
Its democratic government means it must move cautiously. Unlike autocratic China, which can force its will on its people, India must weigh the needs and wishes of its citizens as it takes steps to modernize and trim barriers to trade and investment. Some Indians fret that if change is too rapid, it will adversely affect the lives of many.

India clearly has plenty of opportunities for U.S. firms.
It plans to spend a ton on infrastructure between now and 2012, pouring the equivalent of $320 billion into airports, railways, roads, seaports, and power generation and transmission. Another priority: Food processing equipment, particularly facilities to keep food cold. Given how much needs to be done, more spending is sure to follow.
Scores of U.S. businesses will benefit from the spending spree, including thousands of small companies that supply larger contractors.

India ’s currency policy is a big plus for U.S. exporters. With New Delhi no longer intervening in its currency markets, the value of the Indian rupee is stronger compared with the U.S. dollar.
Indian consumers have improved buying clout because the policy has allowed the rupee to appreciate more than 11% against the dollar in the past year. China still manages its own currency. As a result, the yuan has risen only 4.3% against the dollar in the same time frame.

American higher education continues to fuel business ties between the U.S. and India. Indian grad students consider U.S. colleges to be the most attractive option for a variety of advanced degrees, ensuring that more Indian business and tech leaders will be U.S. trained. In fact, India will continue to be the top source of foreign students at U.S. universities. Students from China will stay at number two.