IInflation is the biggest challenge facing small businesses this year, according to a report by the National Federation of Independent Businesses last month, with a whopping 91% admitting that rising prices are having a “substantial” or “ moderate” on their businesses.
The U.S. Chamber of Commerce says nearly seven in 10 small businesses raised prices to deal with inflation, which is also considered their “dominant challenge.” Sixty-five percent of small businesses surveyed in a Goldman Sachs study said rising input costs have forced them to raise the price of their goods and services this year, with nearly 80 percent saying the economy is getting weaker. had worsened in the last three months.
If you’re having inflation issues in your business, you’re not alone. However, there is good news for you. And, unfortunately, bad news. The good news is that inflation seems to be leveling off.
Prices for basic materials such as industrial chemicals, building materials, copper, aluminum, plastics, packaging, iron and steel and even agricultural products such as fertilizers and processed foods stabilize or do not increase rapidly. The price of lumber products has fallen significantly from its highs of last year. Oil prices are down 30% from the start of the summer.
This is partly because the global supply chain is starting to show signs of normalcy (port traffic in Long Beach, California has fallen to 84 ships offshore, significantly less than during the pandemic, massive shutdowns in China have ended and the Baltic Dry Index, a key measure of freight costs and shipping demand, has fallen nearly 30% since the beginning of the year). There has also been a general slowdown in global demand for goods which, while not significant, has certainly affected prices.
It’s doubtful that the Democrats’ Cut Inflation Act — whatever positive impact it should have on our climate and health issues — will have much of an impact on inflation. Penn’s Wharton School says the bill would actually raise inflation through 2024 and has “low confidence that the legislation will have an impact on inflation.” But the good news is that government spending has fallen significantly and the Fed is no longer throwing fuel on the flames.
This brings me to the bad news: we are still struggling with rising costs and the situation is not going to change anytime soon. Producer prices – at 11.3% in June – are still well above historical levels and, as the producer price index is considered a leading indicator, this means that ultimately prices consumption will remain at high levels for the coming months. It took a year and a half for inflation to reach these levels (consumer prices started to rise in March 2021 and reached 7% at the end of 2021, well before Russia invaded Ukraine). It will take at least as long for it to return – hopefully – to the more sustainable levels we have seen in the past. It may take even longer.
Indeed, many obstacles stand in the way of a significant control of inflation. Some economists, including former Treasury Secretary Larry Summers, believe the Fed’s moves aren’t aggressive enough.
Additional pressure from the war in Ukraine could drive up energy and food prices, especially as the winter months approach. Further Covid cases in China could again disrupt the supply chain. Even if the global economy begins to grow significantly again in the near future, this growth could strain our fragile supply chains and disrupt the prices of many of the basic materials we purchase.
So what if you are a small business? You leverage your accounting and customer relationship management systems to stay on top of your product lines, profits, and customer margins. You raise prices wisely and prudently. You communicate frequently with your customers and you develop your relationship with your suppliers. You are constantly looking for other sources of supply. You try to lock in long-term contracts and, like so many big brands, practice “shrink-flation,” where you charge the same price for a little less product. You keep your inventory under control, your overhead low and your cash balances as high as possible.
You’re doing all this because, although it’s probably peaked, inflation isn’t going away anytime soon. We are no longer in 2012, when rates hovered around 2%. It’s 2022 and you can expect your base material prices to remain significantly high for at least the next six to 12 months. My best clients always plan ahead. So plan for that.