Interest rates have risen to a two-decade high in the fight against inflation. They are having their intended effect with some South Florida companies — slowing business. WLRN’s Tom Hudson spoke to three owners whose businesses are being affected in very different ways.
Last summer, coffee prices were up 20% from a year earlier. It was a small contributor to the overall inflation rate, but one that could be easily felt if you drink coffee.
The average price for a pound of ground roast coffee hit over $6 in December. Jamie Mardis just paid 20 times that and his coffee beans are not yet ready to be ground.
But for him, it’s not inflation — we'll get to that in a moment. It’s the flavor.
He’s happy with that price because it was for ultra-exclusive Geisha coffee from Colombia.
“It's not a coffee that you enjoy with cream. It's for a coffee drinker who is a connoisseur who really is looking for a good medium, well developed, balanced coffee,” he said.
Now, if you don’t know your coffee beans from your barista, Geisha coffee is one of the world’s most expensive because of its taste, sure, but really because of supply and demand. It takes high elevation, rich soil and a cool climate to grow the best Geisha that fetch hundreds of dollars per pound.
“It's a really hard plant to take care of and it's very susceptible to disease,” Mardis said. “So it's really hard to farm and produce quite a large quantity of Geisha coffee. And the really good Geishas are highly sought after.”
Mardis beat out a bidder from China to bring the coffee to his roasting company based in Hollywood – Koffee Kult. He spent about $30,000 on the prized beans. He paid cash, and by doing that he avoids the additional cost of using borrowed money.
READ MORE: South Florida inflation stays high. Regional Federal Reserve boss says be patient
Borrowing money has gotten a lot more expensive over the past year-and-a-half. The Federal Reserve started raising its benchmark borrowing rate 18 months ago in what has been the fastest pace of rising rates since the early 1980s.
Where the higher cost of borrowing money has hit Mardis is real estate.
“We need to grow, we need to purchase a new building. But doing that with interest rates is really expensive. Commercial [borrowing rate]) were down about 4.5% to 5% before,” Mardis said. Today, he’s seeing interest rates at twice that level for commercial lending.
That’s too expensive for him, so he’s doing exactly what higher interest rates are designed to do — slow business down.
“I would definitely say it has slowed our growth and it has made us less ambitious. We know growing is going to be more painful and more expensive. So we're not pushing as hard to grow, opposed to just being okay with what we have, for now,” he said.
The trickle effect
Rising interest rates are supposed to slow down an economy by making borrowed money more expensive. More expensive borrowing costs are meant to reduce buying demand. Less demand is expected to lead to lower prices. That’s the economic chain reaction the Federal Reserve has been after.
“It's always troubling because deep down when the Federal Reserve says they're going to increase the rate, you know immediately that means that rates are going to increase across the board for everyone,” said Mario Murgado, owner of Murgado Automotive Group, which owns two dozen car dealerships in three states, including several in South Florida.
The price of cars, trucks and SUVs helped fuel inflation. Squeezed by high demand thanks to very low interest rates at the time and tight supply thanks to the shortage of semiconductors in 2021, the price of new vehicles was up more than 10%. With fewer new cars and trucks, drivers bought up used vehicles, sending those prices up almost 50% at one point.
As the supply chain for semiconductors has been straightened out, vehicle inflation has cooled off. But as interest rates have risen, so has the cost to operate Murgado’s dealerships. He figures the higher borrowing costs have increased his costs by more than $5 million compared to early last year before rates started to rise.
“Where does it come from?” he asked.
Murgado found most of the money in his remodeling budget. He’s had to delay sprucing up some of his showrooms and repair shops. And that has a ripple effect.
“The contractor that was thinking about that job no longer has it. The subcontract that produces the windows doesn't have it. The tile guy who is going to put the tile [in] doesn't have it. The company who is going to produce the tile can't produce it for me, whether it be in Spain, Mexico, Italy, anywhere. The guy who imports it can't do it,” he said.
Interest rate immunity
Kristina Hebert’s business has not gotten caught in the wake of rising interest rates, though. Hebert is the CEO of Ward’s Marine Electric based in Fort Lauderdale.
"Thank goodness there's not really a whole lot of common sense in buying a super yacht or sport fish (boat) or or a six-engine center console,” she said. “There just isn’t. And every single owner would tell you, ‘Oh, absolutely not.’ But they love it.”
That passion, and the disposable income necessary, translates into steady business for Hebert. She’s the third generation to lead the company. It provides electric power to boats from center consoles to big yachts.
Her customers have the financial resources to be mostly immune to higher borrowing costs, including her’s. She raised her labor charge this year for the first time in four years.
“You're looking at higher banking fees, higher credit card fees, higher interest rate,” she said. “Yeah, the cost of doing business simply goes up.”
And slowing a fast rising cost of doing business is one of the goals of raising interest rates.
