“We have had undesirably low inflation for 25 years. I say bring on inflation,” said Mark Zandi, chief economist at Moody’s Analytics (Boston Globe, 2021). Lower prices always seem to be a good thing. Inflation is the most insidious and unfair tax our government imposes on society and relentlessly attacks the economic status of the smallest, weakest members who cannot protect themselves. Small ‘nest eggs’ that are already yielding meager interest income (thanks to Fed policy) are now seeing the purchasing power of their savings diminish daily as prices rise 9% or more. Millions of small business owners on high streets across the country are similarly affected by the inflation caused by seriously misguided economic policies. Out the back door come higher energy costs, higher costs for materials and supplies, utilities, rent and employees. The Producer Price Index is near double-digit levels. At the front door, shortages, covid and volatile prices highlighting the bottom line, source of salaries and capital to support the growth of the company.
The NFIB’s most recent inflation survey (a sample of the NFIB’s approximately 300,000 affiliates) found that nearly all (96%) small business owners reported some degree of supply chain disruption, 48% significant, in sales that they could have made if they had the stuff at home. demand. When asked what pressures contributed to higher costs in their business, “fuel (gasoline, diesel, heating oil, etc.)” and “inventory, supplies and materials” were most often cited as a significant cost item. More than three quarters (79%) reported that rising fuel prices were a substantial contributor to higher costs. Seventy-two percent reported “inventory, supplies, and materials” as a major contributor to increased costs. Labor and utility costs were each identified by 31%. The cost of utilities (e.g. rent, etc.) was cited as a cost driver by only 4%, mainly because these costs are usually set contractually and may not even include an inflation escalation clause, as inflation was only an issue in the very short term. recently. Looking at the downside of such agreements, 45% reported having fixed price agreements with customers, making it difficult or impossible to raise prices. Virtually no firm reported that these factors had no impact on their operations.
To survive, owners had to take measures to neutralize the impact of all this on their businesses. The immediate impact of rising costs is a reduction in profits, and 82% reported a reduction in profits due to input cost inflation. Owners usually have some operating margins to adjust to make up for this. The most obvious is to increase sales prices, reported by 86%. Other adjustment margins include reducing the quality of products and services, 17%, using cheaper inputs, 23%, investing in more energy efficiency, 18%. Twenty-nine percent said they were borrowing more to cover rising costs. And last but certainly not least, cutting labor costs (wage cuts, employment cuts), a difficult step, but increasingly likely as the economy weakens and each worker generates less income.
Of course, all of these adaptations necessarily have an impact on the well-being of the general public, the ultimate consumer of the goods and services produced by small businesses (or any company for that matter). Ultimately, all costs and shortfalls will be borne by the consumer. The main way the Federal Reserve fights inflation is by reducing demand. When fewer buyers show up, producers lower prices and lower their costs in the ways discussed above.