As U.S. consumers consider the effects of the fastest jumps in inflation in 40 years, economists are quick to point out that people with the lowest incomes suffer the worst effects. It’s a similar story for small businesses, which operate at the end of supply chains and are most vulnerable to rising labor costs and pricier raw materials.
It’s little wonder that the word “inflation” sounds worst in the ears of small business owners. According to the MetLife & U.S. Chamber of Commerce Small Business Index, 85% of the 750 small business owners surveyed between Jan. 14 and 26 reported the impact of inflation as among their greatest concerns. U.S. Chamber of Commerce vice president of small business policy Tom Sullivan said: “The importance of that number is that it’s twice the amount of business owners who were worried about inflation a year ago. It’s 10 percentage points higher than it was at Christmas.” The National Federation of Independent Business Small Business Optimism Index for March had similar results.
The steady rise in worry should surprise nobody. The U.S. Consumer Price Index showed an 8.5% hike in inflation in March from a year earlier, led by rising food and energy prices. As the country looks to Washington, D.C., for some policy measures that will tame inflation — such as the Federal Reserve’s series of interest rate increases, a possible end to tariffs on Chinese goods, reduced regulations and increased domestic energy production — small business owners are scrambling to keep pace with the changing economic climate.
It’s most apparent to their customers. “We have raised prices twice over the past year and a half,” said Caroline Yi, owner of Sunday Morning Bakehouse, a bakery in North Bethesda, Maryland. “You can only raise prices up to a certain point before they start to seem exorbitant.”
Yi is far from alone. The U.S. Chamber’s small business report said 67% of U.S. small businesses had raised prices in the last quarter, and the NFIB said 72% of its members had done the same. The U.S. Chamber said about half of small businesses plan to raise prices in the next three months. The stats are telling, but Sullivan said they miss an important part of the story. “That number doesn’t tell the story of how much small businesses don’t want to raise prices,” he said. “It’s kind of against their core beliefs. The reason they run small businesses is to provide goods and services to their customers, and they feel like they’re compromising something if they raise prices. It’s not an easy decision.”
But there’s very little alternative. A pandemic-induced labor shortage, which pushes small business owners to pay more for scarce help or to fill the gaps themselves, combined with years-long supply chain issues and the rising cost of raw materials from lumber to lunch meats, is squeezing profit margins everywhere. “Those margins don’t change,” said Sullivan. “Prices may go up, revenues may go up, but profits don’t go up.”
One source of stability for small businesses may be their real estate costs. NFIB Research Center executive director Holly Wade reported that in NFIB’s latest survey, rent increases were a substantial source of cost pressure for only 7% of NFIB members and rent was not a factor in increased costs for 54%. While that doesn’t account for NFIB members that do not rent space for their businesses, small business owners are less concerned with their space costs than with almost every other variable that affects profits.
National Retail Federation director of grassroots Meghan Cruz said small businesses are pressured from nearly every direction from high gas prices to frequent supply chain hiccups. “It’s all coming to a head in kind of a perfect storm that’s making it an incredibly difficult time for small businesses,” she said.
She urged small business owners to urge Congress to ease pressures through four possible policy shifts: reforming ocean shipping business practices to lower the cost of moving goods, repealing trade tariffs with China, addressing the labor shortage through “smart immigration reforms” and lowering the cost of electronic payment processing. She acknowledged that the current hyperpartisan political climate complicates these efforts. “There are some [measures] that are more realistic and will move more quickly than others,” she said.
While politicians wrangle and bicker on Capitol Hill, bakery owner Yi, whose shop is less than 25 miles away, keeps watching as the combination of rising prices and balky supply chains bruise her business. She opened the shop in 2017, leaving a marketing job to pursue her passion, but has been affected by global macroeconomic trends since early 2020.
“We’ve seen a whole lot of [inflationary effects] across the board: raw ingredients prices increase for flour, butter and produce, and for our paper goods too, which started at the beginning of the pandemic,” she said. “We have seen, no exaggeration, a 200% increase in prices for things like cups and napkins, and because of supply chain issues, even though we order the same amount of inventory every week, it seems that every other week, we’re short.”
NFIB’s Wade said that while inflation affects the entire economy, small businesses face singular pressures. “They don’t generally have the economies of scale in their orders to influence suppliers” on pricing or priority allocation when goods are scarce, she said. “That’s a huge challenge for them in the pecking order of where they line up for deliveries. If they’re at the bottom of the list, there’s not much they can do.”
By Will Swarts
Executive Editor, ICSC Small Business Center