Inflationary pressures on small businesses show little sign of easing

Owners seek relief from every corner

While the United States may no longer be in the grips of a full-blown pandemic, small to mid-sized businesses are still dealing with the ramifications from being on lockdown for nearly two years.

The market is one giant roller coaster ride as inflation remains an ever-present threat with rising commodity prices, dwindling purchasing power, and though people are returning to work, labor issues abound.

U.S. inflation dipped slightly in April to 8.3% from 8.5% in March, according to the U.S. Department of Labor’s consumer price index report released on May 11. Nearly all the commodity prices that drive inflation held steady or rose slightly except energy, used cars, and clothing which dropped in April.

As the Federal Reserve does its part by raising interest rates to slow demand, they’re not working on the supply side of the equation, according to Neil Bradley, executive vice president, chief policy officer and head of strategic advocacy at the U.S. Chamber of Commerce, a Washington, D.C.-based lobbying group.

“Even if the Federal Reserve gets this exactly right, we're still in for a lot more inflation over the course of at least the remainder of this year,” Bradley said during a virtual Q&A session on May 5 about the state of small businesses.

What’s a small business to do?

In response to these inflationary pressures, 67% of small business owners told the U.S. Chamber of Commerce in a survey that they must raise prices to combat inflation.
Businesses understand how counterintuitive that might seem, so they were also looking at making efficiencies with labor and some are even borrowing money.

As part of a multiyear collaboration, the U.S. Chamber of Commerce and MetLife, a New York-based insurance company, conducted an online survey of 750 small businesses to find out how different issues are impacting them. The Small Business Index is released each quarter.

“Borrowing money may be an initial short-term strategy as interest rates rise and become a less viable option for small businesses which means we'll see more pressure on the pricing side throughout the rest of this year,” Bradley said.

Inflation is forcing businesses to look at areas where they can save money and labor is one of those areas. By making the workforce more efficient or automating certain processes to reduce labor costs, according to the survey.

Bringing workers back to the fold

But trying to save on labor costs which could mean using fewer workers is a direct contradiction when the goal is to get more people into the labor force. The labor participation rate changed little from the previous month with April at 62.2%, according to DOL.

U.S. employers added 428,000 jobs in April down slightly from 431,000 jobs in March and the unemployment rate held steady at 3.6%, according to DOL’s May 6 report. Industries that saw the largest gains were leisure and hospitality, manufacturing, and transportation.

The continuing problem, millions of open positions and too few takers. So, employers of all sizes are having to get creative when it comes to filling the positions and retaining current employees. By some estimates there are roughly a million working mothers no longer in the workforce due to childcare concerns. Therefore, some companies are starting to offer childcare services.

With the growing number of people deciding they would rather work from home; companies are also offering employees hybrid work schedules or remote work on a permanent basis just to retain employees.

If an employee has already demonstrated productivity in a virtual role, that employee may want to continue the arrangement, according to Lawrence Schaefer, president of Schaefer Halleen LLC, a Minnesota-based law firm specializing in employment law.

The affected employee may claim a need for a continued remote work arrangement as a requested accommodation, and either cite conditions which could be considered disabilities, or personal family obligations which implicate leave laws such as the Family Medical Leave Act (FMLA). Signed into law in 1993, the FMLA entitles eligible employees to take unpaid, job-protected leave for specified family and medical reasons, according to the DOL.

Lack of purchasing power hitting youngest at the worse time

In April, the average hourly earnings for all private employees rose 10 cents to $31.85 per hour. Unfortunately, as workers earn higher salaries much of it is swallowed up by the higher price of goods and services. Jeffrey B. Marks, president, and founder of Colorado-based Prime Financial Strategies, Inc. is concerned about the younger generation (millennials and Generation Z) who haven’t experienced such economic volatility before and will have trouble saving and investing.

In fact, the National Association of Realtors conducted a survey of 1,995 student-loan borrowers in 2021 and found that over one quarter of them said their debt impacted their decision or their ability to purchase a home (29%), take a vacation (35%), or purchase a car (31%).

“There is a rough correlation between rising inflation and rising interest rates making borrowing for acquiring assets even more difficult,” Marks told Advisors Magazine.

In this kind of environment, it’s critical to have a mix of ownership assets like equities and real estate which historically are more volatile with more growth and loanership assets like bonds and cash which are less volatile and growth restricted, according to Marks.

Saving earlier and planning for future financial goals, creates options, according to Michelle M. Merkel, president, and founder of Ohio-based Merkel Wealth Management.

“Many focus on experiences rather than saving for their future,” said Merkel. “Inflation is real; used car purchase prices have increased 42% and increased gasoline prices have impacted costs for everyday goods, groceries, and travel. All have slowly impacted the discretionary cashflow available for savings.”

Millennials and Gen Zers need to have a higher commitment to saving as it will be harder to provide financial security from compounded growth, according to Merkel.

“With inflation there is a greater need to have your investments grow, to have the ability to manage rising expenses, and have accumulation,” she added.

As businesses continue to watch consumer prices, and as unemployment figures and the average American closely watches their finances in this inflationary period, it’s also important to note that the economy is not all bad news. Entrepreneurship has grown.

There is a small business boom as 5.4 million Americans applied to start a business – more than 20% higher than any previous year on record. And businesses with fewer than 50 employees created 1.9 million jobs just in the first three quarters of 2021, according to Isabella Casius Guzman, Administrator of the US Small Business Administration.

Follow Us

Subscribe to Our Newsletter

What's Next, Updates & Editorial Picks In Your Inbox

© 2017-2021 Advisors Magazine. All Rights Reserved.Design & Development by The Web Empire