Inflation Balancing Act: Businesses Must Move Wages & Revenue in Tandem
Business owners are facing an issue many have not experienced in their lifetime as inflation reached its highest level since 1982 with consumer prices jumping 7 percent last year.
“The last time inflation was this high, Ronald Reagan was in the White House, Olivia Newton-John was all over the radio, and the cool new computer was the Commodore 64, named for its 64 kilobytes of memory. Oh, and there was a new soft drink about to hit the shelves,” NPR’s Kelsey Snell said of a time before Diet Coke was an option.
The advantage – or disadvantage depending on how you look at it – that business owners in 1982 had was that they knew all about inflation and the vice grip it put on profitability as they had been caught between rising costs of both materials and labor for more than decade.
“Back then, inflation had been high for the better part of a decade. Richard Nixon, Gerald Ford, Jimmy Carter had all been dogged by high inflation. And by the time Reagan came into office, Americans had kind of gotten numb to prices that just kept going up and up,” said NPR’s chief economic correspondent Scott Horsley.
Business Owners Confronted with a Confluence of Events
While we are only halfway to the peak annual inflation rate of 14.6 percent in 1980, today’s business owners have been confronted with a confluence of world events that has created rising costs for goods and materials along with demand from employees for high wages.
In just the past year, business owners have seen a whirlwind of issues, including:
- Pent-up consumer demand from the easing of the COVID-19 pandemic restrictions
- Supply chain bottlenecks that have created goods and materials shortages while pushing up costs of those supplies
- Historic tight labor market amidst “The Great Resignation”
- Rising inflation
“Small business owners have cited inflation as the biggest issue they face while running their business, according to research conducted by the National Federation of Independent Business (NFIB),” reported Small Business Trends in January.
Triple Digit Oil Per Barrel Adds to Inflation Pressures
If that wasn’t enough for business owners to digest, the Russian war in Ukraine has seen oil prices skyrocket as CNBC reported March 8, 2022 that “crude oil jumps with the U.S set to ban Russian imports.”
With the U.S. oil benchmark flirting with $130 per barrel, some are fearing that the higher energy costs will prod inflation more, even creating a “stagflation” situation marked by a period of inflation combined with a decline in the gross domestic product (GDP).
“Stagflation is rapidly becoming the central focus in portfolio strategies," Jim Paulsen, chief investment strategist for the Leuthold Group told CNBC. “Preparing for slower growth and more persistent inflation is driving investor fears and actions.”
Bloomberg Businessweek reported that some business owners, already battling the twin dragons of supply chain woes and labor shortages, are now bracing for a second wave of “profit destruction” with triple per barrel oil prices.
“It’s just a disaster,” Isaac Larian of MGA Entertainment, Inc., maker of goods such as Bratz and L.O.L. Surprise! dolls and Little Tikes toys, told Bloomberg. “There’s not much you can do.”
Businesses, which rely on the supply chain for their materials and goods, will pay for the higher prices as most transportation options – trucking to railroads to maritime shipping – factor in crude oil prices with fuel surcharges that are automatically passed along to their customers.
Businesses Must Raise Prices to Meet Rising Costs, Salaries
According to Business.org; business owners, especially small business owners, were already trying to balance between the need to raise their prices while paying for increased materials and labor costs.
“Since the pandemic began, 92 percent of small-business owners reported that the cost of supplies or services needed to run their business has increased since the pandemic started,” wrote Trevor Wheelwright.
These are not just small increases for supplies and services with 71 percent of small business owners reporting at least a 20 percent hike in a business.org survey:
- 16 percent of small-business owners report a 50 percent increase in costs
- 13 percent of small-business owners report a 40 percent increase in costs
- 16 percent of small-business owners report a 30 percent increase in costs
- 26 percent of small-business owners report a 20 percent increase in costs
- 19 percent of small-business owners report a 10 percent increase in costs
“As a result, 82 percent of small-business owners have had to increase the price of their products or services due to inflation since the pandemic began,” wrote Wheelwright. “Almost half of businesses (45 percent) have raised their prices by more than 20 percent, while 44 percent report raising prices no more than 15 percent. Only 11 percent of small-business owners report no increase in their prices.”
Threading a Needle: Passing Along Costs to Customers
Keeping prices at a level that meets the rising costs and wages demand can be a bit like threading a needle.
“For many companies, passing costs along can be tough,” wrote Bloomberg, which profiled a Phoenix heavy-equipment operator that had to increase the charge for field technicians by $20 to $150. “The higher price only made up for last year’s fuel and labor cost jumps and won’t cover even higher gasoline prices this year.”
The company owner said: “It ultimately puts a pinch on my profit. Now I have to be creative and figure out different ways to absorb that cost.”
That business owner is not alone with business.org finding that:
- 60 percent are concerned about the financial health of their business because of inflation
- 47 percent report their profit margin decreasing due to inflation since the beginning of the pandemic
- 37 percent of small-business owners are afraid inflation will hurt the health of their business
- 37 percent report customers have complained about inflated prices at their business
- 30 percent think raising their prices will deter customers from shopping at their store
It's a tough time for business owners right now. Balancing employee wages along with pricing and cost adjustments is never easy. We can help, reach out if you need our guidance.