US inflation isn’t going away. Small businesses must plan ahead

Inflation is the top challenge facing small businesses this year, according to a report issued by the National Federation of Independent Businesses this past month, with a whopping 91% admitting that rising prices are having either a “substantial” or “moderate” impact on their companies.

The US Chamber of Commerce says that nearly seven in 10 small businesses have raised prices to cope with inflation, which is also considered their “dominating challenge”. Sixty-five percent of small business respondents in a Goldman Sachs study said rising input costs have forced them to raise the price of their goods and services this year, with almost 80% saying the economy has gotten worse over the past three months.

If you’re having inflationary challenges in your business, you’re not alone. However, there is some good news for you. And, unfortunately, some bad news. The good news is that inflation appears to be plateauing.

Related: Is inflation finally on the decline in the US? It’s complicated

Prices for core materials such as industrial chemicals, construction supplies, copper, aluminum, plastics, packaging, iron and steel and even agriculture products like fertilizer and processed feeds are either leveling off or not rising quickly. The price of lumber products has dropped significantly from their highs last year. Oil prices are down 30% from earlier this summer.

This is partly because the world’s supply chain is beginning to show signs of normalcy (port traffic in Long Beach, California, is down to 84 ships off the coast, significantly less than during the pandemic, mass lockdowns in China have ended and the Baltic Dry Index, a key measure of freight costs and shipping demand, has fallen almost 30% since the beginning of the year). There’s also been a general slowdown in the world’s demand for goods which, while not great, has certainly affected prices.

It’s doubtful whether the Democrats’ Inflation Reduction Act – regardless of the positive impact it should have on our climate and healthcare problems – will have much impact on inflation. Penn’s Wharton School says that the bill would actually increase inflation until 2024 and has “low confidence that the legislation will have any impact on inflation”. But the good news is that government spending has significantly decreased and the Fed is no longer pouring fuel on the fire.

This brings me to the bad news: we are still struggling with rising costs and the situation isn’t going to change any time in the near future. Producer prices – at 11.3% as of June – are still up well over historical levels and, because the Producer Price Index is considered a leading indicator, that means that ultimately consumer prices will remain at elevated levels for months to come. It took a year and half for inflation to reach these levels (consumer prices began rising in March 2021 and hit 7% by the end of 2021, well before Russia invaded Ukraine). It’s going to take at least that long for it – hopefully – to return to the more sustainable levels we’ve seen in the past. It may take even longer.

That’s because there are lots of obstacles in the way of significantly taming inflation. Some economists, notably former treasury secretary Larry Summers, believe the Fed’s moves aren’t aggressive enough.

Further pressure from the Ukraine war could elevate energy and food prices, particularly as we head into the winter months. More Covid cases in China could once again disrupt the supply chain. Even if the world economy begins to grow significantly again in the near future, that growth could put strains on our fragile supply chains and disrupt pricing for many of the core materials we buy.

So what to do if you’re a small business? You leverage your accounting and customer relationship management systems to stay on top of your product lines, customer profits and margins. You raise prices discriminately and carefully. You communicate frequently with your customers and you expand your relationship with your suppliers. You constantly hunt for other sources of supply. You try to lock in long-term contracts and, like so many big brands, practice “shrink-flation”, where you charge the same price for a little less product. You keep your inventories under control, your overhead low and your cash balances as high as possible.

You do all of this because, even though it has probably peaked, inflation isn’t going away any time soon. It’s no longer 2012, when rates hovered around 2%. It’s 2022, and you can expect the prices of your core materials to remain significantly elevated for at least the next six to 12 months. My best clients are always planning ahead. So plan for that.