The High Cost of Inflation

Inflation. We’re hearing about it more and more – from economists, politicians, and even our friends and family. People are concerned. Their anxiety is justified, especially for those of us with enough gray hair to remember going down this road before – some 40 years ago.

 Inflation occurs when the price of goods and services increases over time. This is quite normal, which explains why $100 was worth a lot more in 1922 than it is worth today (more than $1,500 in 2022 dollars!) So long as the inflation rate is low and stable, most people don’t worry about it too much.

 What gets people talking is when the inflation rate jumps dramatically in a short period of time. In the 12 months leading up to March of 2022, the inflation rate in the U.S. was 8.5% – the highest it’s been since 1982. In comparison, over the last hundred years, the average inflation rate has been just above 3%.

 The problem with rapid inflation is that we quickly lose our purchasing power. For people on fixed incomes, or those with an annual increase in earnings of less than the rate of inflation, each dollar we make buys less than it used to. Unfortunately, even if you received a 5% pay raise this year, you’re poorer today than you were a year ago.

 For small businesses, this is a major problem. They began signaling inflation as an issue during the summer of 2021 when NFIB’s Small Business Economic Trends survey found increasing numbers of small business owners reported “inflation” as their single most important problem. The survey also reported escalating numbers of small business owners raising prices and planning to raise prices. Owners were experiencing rising input costs resulting from supply chain disruptions, staffing shortages, and rising fuel costs. These challenges continue to impact small business owners broadly across most industry sectors.

 In an April 2022 special survey on inflation from the NFIB Research Center, an astonishing 100% of small businesses reported inflation impacting their business to varying degrees. Over half, (62%) reported inflation as having a substantial impact on their business(es) while about a third (31%) reported a moderate impact. Only 6% reported a mild impact.

 When small employers were asked what is contributing to higher costs in their business, “inventory, supplies, and materials” and “fuel (gasoline, diesel, fuel oil, etc.)” took top billing having the largest percentage of owners reporting them as substantial. “Labor,” “rent,” and “utilities” contribute to cost pressures for many small employers, but to a lesser degree than supplies/inventory and fuel.

 In response, small businesses raise prices on their customers, to the extent they can. About half (46%) of small employers have contracts with customers with fixed price agreements. These make price adjustments more difficult, depending on the terms of the contract. Still, 86% percent of small employers report raising prices, and another 84% are experiencing lower business earnings to some degree. Inflation generally impacts business earnings first before owners can find other ways to absorb costs, like through debt and financing, for example, a viable option for many (31% of survey respondents) likely due to historically low-interest rates and the anticipation that inflation pressure won’t persist long term.

 When asked about how the impact the recent increase in gasoline and fuel prices is having on their business, nearly all (99%) of small employers reported it having some degree of a negative impact on their business. About half (48%) reported a substantial negative impact, 35% a moderate negative impact, 16% a mildly negative impact, 1% a positive impact, and 1% no impact. In Oregon, gas prices are always higher than the national average – and well over $1 per gallon higher than one year ago.

 Bottom line – inflation is demanding the attention of everyone right now, including small businesses, and not many of us have experience navigating a business, or a household, through to the other side of it because it was our parents and grandparents running the show 40 years ago. Their only advantage? They didn’t have to do it on the heels of a two-year-long global pandemic.

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Anthony K. Smith is the Oregon state director for the National Federation of Independent Business