Small businesses rarely raise prices without a good reason from the cost side. If a company simply raises prices for its products or services, customers will take notice and take their business to cheaper companies with the same offering. But when they all face the same cost problems (for example, an increase in taxes or the minimum wage or energy prices), survival forces them to act, and the most common response is to raise prices and pass those costs on to their customers.
In a Dec survey70% of small business owners reported increasing their average selling prices in recent months. Of those who increased prices, 30% blamed rising supply and inventory costs as well as rising labor costs, 46% cited only increases in supply and inventory costs, and 7% blamed labor costs as the reason for price increases. Seventeen cited other cost factors as reasons. While supply chain issues have eased as more supplies become available, prices have not yet returned to pre-Covid levels, and are unlikely to return in the future.
With so many companies raising their prices, inflation is ubiquitous. At 1.5% in 2020, inflation rose to 9% before starting to moderate in the last half of the year. But overall, the rate is still well above the Federal Reserve Bank’s target of 2%. More than 40% of owners reported price increases of 10% or more. Sixty-nine percent raised 5% or more.
To date, supply chain issues have played a major role in the surge in inflation. The resulting shortage of “stuff” to buy coupled with consumers being inundated with government money has certainly driven up prices. As a result, consumers paid more but received less. Prices of cars and houses soared, making goods that spend little time on the shelf before being sold inflationary.
A major problem on the supply side was (and is) the shortage of workers, forcing companies to increase compensation to retain and attract needed workers. These costs have also been passed on to consumers and are now beginning to dominate the inflation discussion. It’s easy to lower selling prices when costs fall, but it’s quite another to ask for labor to make a pay cut, and labor costs are the biggest operating expense for most small employer businesses. This makes inflation “sticky”, especially in the services sector.
Cause price increase
Price increases of 10% or more are definitely “inflationary”, especially when the policy target is an overall inflation rate of 2%. Companies in finance and real estate led the pack, with 83% reporting price increases of 10% or more. Home prices rose, as did corporate mortgage rates as a result of Fed rate hikes. Construction and manufacturing companies were next highest, with 61% and 52% respectively reporting increases of 10% or more. Non-professional services companies, least likely to report huge price increases, were 27% (restaurants and bars only 19%).
In general, shortages (material and labor) have been the main factor driving price increases so far. The supply shortages were expected to be resolved soon, leading to predictions that inflation would be temporary. However, the delivery problems were slow to resolve and persistent. Then labor shortages became a major cost factor as reports of wage increases hit record highs. The result is stubborn inflation that cannot easily be overcome by rate hikes, especially when government injections continue to support spending. Only 20% of all companies report that higher interest rates have a major impact on their business, especially in finance and real estate.
