For a number of years the price of technology to run our businesses has been dropping quite dramatically. Let me give you three general examples:

- Computer hardware — Computers far more powerful than the one with the Pentium I chip that cost me $2,500 a number of years ago, now sell for a little over $500. According to the Bureau of Labor Statistics, prices of personal computer equipment have dropped 10% to 28% each year since 2000.

- Telecommunications — The prices of making phone calls are much cheaper, too. VOIP providers now offer unlimited calling plans within the U.S. and Canada for affordable flat monthly rates. Competition from non-traditional providers, including cable companies and eBay’s almost-free Skype service, has pressured the established telecom companies like AT&T to come out with bundled services to give the VOIP and cable companies a serious run for the money, especially in big metropolitan markets. Small businesses are beneficiaries of all this competition, in the form of lower prices.

- Software – Prices for business software also have come down in price, dropping 3% to 9% each year since 2000. And that doesn’t even tell the full story. You now can find free alternatives on the market in many business productivity categories, thanks to the open source movement. Software-as-a-service options also make powerful software available at hard-to-believe low monthly prices. And as competition heats up in some segments, some vendors such as Intuit are giving away introductory versions of their feature-rich proprietary software for free, to snag you as a loyal customer with the hope of some day in the future “upselling” you to a higher level package as your needs increase.

So what’s all this talk about inflation rearing its ugly little head? How can we can have inflation and rising prices that are squeezing some small businesses mercilessly (like this story about pizza shop owners), while the cost of technology keeps coming down? This fascinating chart tells the tale:

This chart is from the New York Times (click to go over to the New York Times website and see the full-size interactive chart).

Simply put, this chart shows that inflation has crept into certain prices, but not others. The chart shows the proportion of spending among U.S. consumers year over year, March 2007 to March 2008. The blue areas are spending categories where prices have gone down. The yellow, orange and brown areas are categories where prices have gone up since last year.

As you can see, prices in some areas have gone up: gasoline, fuel, certain foods. Prices in other areas have gone down, including technology, communications, certain apparel items.

So what’s the bottom line? For small businesses it means that inflation hits some businesses harder than others.

Depending on how heavily your business depends on the materials in certain categories, your business could either be hurting or not hurting so much. For instance, if you run a pizza shop, where the price of flour has increased several hundred percent, you are definitely hurting. On the other hand, if you run a consulting business, you may not be feeling the effects of inflation so acutely. In fact, with lower technology prices, you may feel downright lucky in the inflation sweepstakes.

We’ll see how long technology prices keep dropping and defying inflation.

Posted in Money Management, Technology