As prices on various products and services have risen to levels not been in nearly 40 years, consumers and business owners alike are starting to wonder if inflation will be here to stay. While you can get a different answer to this question from almost any economist, the fact is the current business environment is one that will be difficult for small business owners in many ways.
With supply chain issues likely to remain a problem for much of 2022, small business owners are caught in the middle of the supply and demand game. Though in reality there is no actual shortage of products per se, having them stuck in the supply chain bottleneck essentially creates an artificial shortage, making it harder to buy computers and other supplies. When combined with other factors such as workers demanding higher wages, this results in an increase for everything across the board for business owners.
Renting Retail Space
Since the onset of the COVID-19 pandemic, consumers have been demanding and purchasing supplies of products at an unprecedented rate. As a result, some businesses have looked at this time as one where expansion could still be possible. Unfortunately, inflation has also impacted the real estate market, making commercial retail space even more expensive. When combined with smaller profits from higher expenses, it has become far more difficult for business owners to find new locations that are affordable. In fact, while some business owners have hoped for expansion, others have chosen to move locations to cheaper retail space, although inflation has made this harder to do over the past year.
Rising Energy Costs
To put the current inflation situation into perspective, 92% of small business owners have reported the cost of supplies and services required to run their businesses has increased since the pandemic. For almost 20% of those owners, the cost increases have exceeded 50%. While some have taken cost-cutting measures such as reducing their workforce, reducing marketing costs, and reducing inventory, others have chosen to stay the course and believe the current inflation problems will only be temporary.
Pent-Up Consumer Demand
If there is one thing that is continuing to drive the inflation train down the tracks, it is consumer spending brought about by a pent-up demand for products during the pandemic. As more people have been forced to stay home, online shopping has skyrocketed. While good in one way, it has put increased pressure on small businesses to keep up with the demand. Unable to do so in many cases due to supply chain issues, the result has been increases in shipping costs, lack of sufficient inventory for the holiday shopping season, and problems having the money needed to repair or maintain business property or equipment.
Why There May be Hope
Though inflation is making it harder on small businesses everywhere, many owners do have hope for 2022. For starters, surveys have shown that 85% of small business owners believe the pandemic has resulted in a stronger desire for many consumers to shop locally and support their community’s small business owners. These same surveys show that consumer spending is also staying strong, with 71% of business owners reporting increased consumer spending in 2021. Finally, over 75% of small business owners state they believe holiday sales will help to offset many losses and additional expenses they have incurred over the past year.
The Fed Outlook
To keep inflation from creating permanent economic damage to small businesses and consumers, the Federal Reserve does insist current inflation issues are resulting almost exclusively due to supply chain bottlenecks and other pandemic-related issues. Though many people are concerned about the possibility of long-term inflation, Fed Chairman Jerome Powell not only believes today’s inflation will be transitory, but that the term “transitory” itself will be able to be retired in the near future. Though prices have risen more than six percent over the past year, the Fed has an annual inflation rate target of two percent. By combining the tools at its disposal and letting supply chain issues resolve themselves over 2022, small business owners have every right to be hopeful for the upcoming year.
Rebalanced Spending Patterns
As mentioned earlier, the pandemic created an entirely new pattern of consumer spending. Between the increase in online shopping and supply chain problems that had many brick-and-mortar stores with empty shelves, the result has been what is known as “goods inflation,” which points to a lagging supply and a demand surge from consumers. But as vaccination rates increase throughout the U.S. and some sense of normalcy returns, consumer spending is expected to shift from almost exclusively goods to more services, which is an area where spending during the pandemic has been unusually low.
A Self-Fulfilling Prophecy?
If there is one big risk regarding inflation, it is that it becomes a self-fulfilling prophecy for the U.S. economy. The longer higher inflation rates persist, the greater the temptation for companies to continue raising prices on their goods. Likewise, workers may continue seeking higher wages, leading companies to focus on cost control and productivity concerns. However, any worries small business owners have about inflation turning into stagflation should be put aside. As many economists have noted, global growth, particularly for small businesses, continues to be strong. At the same time, government spending on infrastructure and other related programs is seen as something that enhances local business communities, meaning business owners who can successfully navigate the current higher inflation rates should be rewarded in 2022.
Despite many small businesses having trouble attracting new workers or enticing current employees to return to their jobs, there is much to be optimistic about in 2022 in terms of inflation. With the U.S. now being in a much stronger position to fight the pandemic, supply chains will eventually begin to open up. When they do, supplies will once again be available, inventories will return to normal levels, and the current sky-high inflation rates will likely be nothing but a distant memory as business owners move forward.