Surging Inflation Compelling Small Businesses to Raise Prices

This article was contributed by our friends at Supply Chain Dive.

Dive Brief:

  • Two out of three small businesses have raised prices during the past 12 months and 85% are concerned about the persistence of the highest inflation in 40 years, according to a quarterly survey by the U.S. Chamber of Commerce and MetLife.
  • In an effort to adjust to rising prices, four out of 10 small businesses have cut staff during the past year, while 39% have taken out a loan, according to the survey. One in three small business owners rank inflation as their number-one challenge, a 10 percentage point jump compared with the survey last quarter. 
  • “Inflation is top of mind for small businesses as it continues to limit their purchasing power, forcing small businesses to raise their prices and absorb higher costs within already thin margins,” according to Tom Sullivan, the U.S. Chamber’s vice president for small business policy.

Dive Insight:

Companies of all sizes face increasing signs that high inflation is becoming entrenched, forcing a review of fundamental business planning, including pricing, wages, and capital allocation.

“Broad-based price increases have become normal across the economy,” according to Neil Bradley, the chamber’s chief policy officer and head of strategic advocacy. “Supply chain disruptions, energy prices, and a persistent shortage of labor are all coming together at a time of sustained demand to force prices up.”

The rising cost of inputs has prompted companies to pass on higher prices to consumers. The producer price index for final demand, a measure of what suppliers charge, soared 10.3% in February from the prior year as the pandemic continued to crimp supply chains in industries from housing to technology.

Meanwhile, the consumer price index (CPI) rose last month at a 7.9% annual rate, the fastest pace in four decades, according to the Labor Department.

“Larger companies can often delay price increases, even when their input costs increase through efficiencies and reductions in margin,” Bradley said, adding that such forbearance is usually more difficult for smaller companies.

“What we are seeing right now is that the inflationary pressures are so great and so broad-based that companies are being forced to raise prices regardless of their size,” Bradley said in an email response to Supply Chain Dive sister publication CFO Dive.

“Inflation will probably slow in coming months as pandemic-induced disruptions in supply chains clear up,” Federal Reserve Chair Jerome Powell said at a March 16 press conference after a meeting of central bank policymakers.

Fed officials forecast that their preferred inflation measure — the core personal consumption expenditures (PCE) price index — will decline to 4.1% by December from a 38-year high of 5.2% in January.

The Fed, citing price pressures, raised the federal funds rate on March 16 for the first time since 2018. It has set an inflation target of 2%.

“The survey of small businesses underscores the magnitude of the inflation challenge,” Bradley said. “The survey results confirm that inflation is broad-based, impacting every economic sector and is likely to persist much longer than originally anticipated.”

Despite rising prices, small businesses said they are more confident about their outlook than at any time since the onset of the pandemic in early 2020, according to the survey. The survey of 750 small business owners and operators was conducted from January 14 until January 26.

In a separate survey from American Express and Kabbage, around 90% of businesses said they hadn’t had to slow or halt operations due to the omicron variant.

“It is encouraging to see the steady rise in business confidence on Main Street, even as the latest survey was taken at the height of the omicron wave,” Sullivan said. 

This article was written by Jim Tyson from Supply Chain Dive and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to [email protected]