Let’s start with: What is inflation? Inflation measures the progressive price of goods and services. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.
At 8.3% in April, the annual rate of inflation was down from 8.5% in March but remains at a level unseen since the 1980s.
In response to the high levels of inflation, the Federal Reserve influences interest rates. When inflation is too high, the Fed raises interest rates to slow down the economy, which weakens purchasing power and lowers inflation.
When inflation is too low, the Fed lowers interest rates, speeding up the economy and strengthening purchasing power.
The Fed is constantly adjusting interest rates throughout the year to attempt to achieve a targeted inflation rate of roughly 2%.
How does inflation affect your small business?
Data from MetLife and the U.S. Chamber of Commerce found that 85% of small-business owners surveyed expressed concern about inflation, and 1 in 3 listed inflation as their top business concern.
At the beginning of the pandemic (March-April 2020) the annual inflation rate was nearly 1%. As the pandemic progressed, so have inflation rates.
Both the pandemic and increased inflation rates have affected many businesses, mainly through the supply chain. A shortage of materials and other issues have made products less accessible and therefore more costly. These shortages and price hikes have greatly affected many small business owners. Business owners often lack the power, capital, or resources to compete with larger more established businesses.
Running a business has now become more costly, and to remain competitive, most business owners are forced to increase the price of their goods. This practice can be risky and may not pan out for small business owners. They could be forced to look elsewhere due to price spikes and small businesses could lose their business.
How to adjust your business due to high inflation rates?
To deal with inflation, small business owners must focus on keeping their expenses low, look to cut overhead costs, reduce inventory and/or production costs, and find a “happy medium” price range that keeps your business afloat without losing your clientele.
Small business owners can also look at a small business loan or line of credit to help sustain their businesses in case they need an inflow of cash.
Over time, inflation will be corrected and fall from this 8.3% figure, but in the meantime small business owners will need to focus and make crucial decisions to keep their businesses alive.
Should you need financial or growth assistance within your small business, or to better understand the effect of inflation on small businesses, reach out to our team: [email protected]. We are highly skilled in helping small businesses work towards their growth potential.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.