The Impact of Inflation on Small Business



 

 

Rising inflation is big economic news. From the average American who is being hit at the gas pump to large corporations experiencing rising costs, none is immune from the effects of inflation. The significant uptick in inflation has passed beyond the cloistered realm of economists to the larger consciousness of the country. According to statistics from the Labor Department, inflation has rose on an average of 0.5% with a 30-year high of 0.9% in June. Small businesses, often balancing thin profit margins – especially after the pandemic, are especially susceptible to the effects of inflation.

When the cost of fuel, energy and supplies spikes, it reverberates through the entire economy. The consumer is now paying more on loans, gasoline and food – the extra they might normally spend on products and services provided by small businesses. This creates a situation where many small businesses are being squeezed by rising costs and decreased revenue.

Inflation is easy to understand when you’re filling your car’s gas tankSu, but in the big-picture world of economics, it’s a bit harder to measure. The gross domestic product, which is the measure of the total value of all finished goods and services within a specific time period, directly affects inflation. When the GDP is rising, inflation is low because wealth is being created and distributed through the economy. When the GDP is static or falling, inflation rises. When the pandemic hit in early 2020, many businesses were forced to shut-down or severely restrict their operations, with resultant high levels of unemployment. As the economy constricted and unemployment soared, small businesses, already burdened by Covid restrictions, were now faced with rising costs due to inflation.

The continued impacts of the pandemic, along with rising inflation, are impacting small businesses in Pennsylvania and across America in several ways.

Supply Chain

The economic shut-down that arrived with Covid-19 severely restricted, and in some cases made it impossible for manufacturers to produce the needed levels of goods. The result was that the small businesses that depended on these products found them harder to obtain and because of inflation, more costly.

Pricing

Inflation impacts pricing in significant ways. Product shortages, whether driven by consumer demand or decreased production, cause prices to rise. Small businesses, struggling to meet their supply needs amid rising price, often have to source needed products locally or manufacture them inhouse – inevitably at higher costs, which are then passed on in their own prices. In competition with larger corporations that have more secure supply chains and the financial depth to absorb some of the rising costs, small businesses are more likely to be compelled to raise prices in a manuner that reduces their competitiveness.

Labor Shortages

Wages, as well as prices, can be inflationary. One of the most troubling economic problems emerging from the pandemic has been the shortage of workers. Businesses hoping to return to pre-pandemic levels of production have found their plans hindered not only by rising costs, but by the inability to fully staff. The resultant labor shortage has compelled businesses to artificially inflate wages as means of attracting the necessary workers. Various forms of federally-funded supplemental unemployment have been cited as reason for many individuals remaining out of the workforce. That aid is due to end in September for over 7 million Americans.

Financing

Inflation is directly tied to interest rates. One of the ways the Federal Reserve controls inflation is through raising interest rates. However, rising interest rates would slow growth in an economy already devastated by the pandemic. Fed watchers expect inflation’s benchmark short-term rate to be at a range of 0.5% to 0.75% in 2023. Rising interest rates will have a direct effect on any small business carrying a loan.

For the small business concern, it may feel as if these economic forces are beyond their control. But there are steps that help mitigate the impact of inflation. Attention to productivity and having a clear plan for containing and reducing costs can help offset rising prices. Automation and outsourcing are other strategies for offsetting inflationary costs. Effectively managing your pricing strategies is also key. Consumers will only pay what the market will bear, so it is critical to maintain profit margins when possible, but to also be realistic about when price increases are viable. Inflation is something every small business will needs to be prepared for as it directly impacts consumer spending, the cost of business and financial viability.

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