Business Update from the front line, Main Street

Update from the front line, Main Street


Inflation erupted along the energy frontline in 2020. As Covid entered the fray, shortages and supply channels became big players, hitting especially hard in commodity prices and construction costs. Chickens got the flu and workers got sick or isolated to avoid illness. Chips were scarce (potatoes were not), as were the commodities for which they were crucial, including cars and appliances. Solving some supply-side issues eased the pressure on stuff, but shifted the pressure to the services sector, where labor supply is still scarce and labor costs are rising as a result. Supply increases have largely resolved commodity price inflation, but labor supply is still below 2020 levels and labor force participation has stalled. This is where inflation gets sticky, the prices of commodities, oil, etc. vary with supply and high prices encourage an increase in supply to resolve price pressures. However, this is currently not the case for labour. Fees have increased significantly, but not as fast as inflation-taxed profits are gone. Real wages have fallen by about half a percent over the past 12 months, and total employment is still below 2020 levels.

So on Main Street, owners continue to skirmish with selective supply chain issues. In February 2023, 87% of small business owners reported supply chain issues, with 20% citing it as “significant”. However, input costs decrease, except for labor (the largest cost item for most small, labour-intensive businesses). The net percentage of companies raising sales prices has fallen from its recent peak of 65% in May 2022 to 33% in April this year, a decline of 32 percentage points in 11 months (Chart 1). Reports of fee increases fell from the January 2022 peak of 50% to 40% in April, a reduction of just 10 percentage points. Plans to increase prices gained 30 points in the past 11 months, while compensation plans lost 11 points since peaking in October 2021. The cost of new hires may fall in a weak market, but wages currently paid to existing workers , will not do that. Sticky. Historically, large reductions in labor costs have almost always been achieved by laying off workers as in a recession. Few workers voluntarily take a pay cut, instead, lower pay usually comes in the form of being laid off and then finding a new job at a lower pay.

Economic forces do not affect businesses evenly geographically. The California economy is very different from Ohio or New York. Reports of price increases were highest in New England at 59% and lowest in the Pacific region at 38%, down 21 percentage points. Industry concentrations may explain some of this, with 59% of construction companies reporting higher sales prices, compared to just 18% in professional services. Industrial activity does not occur evenly between states. Farm companies continue to lead the price cut parade with 34% reporting price cuts (market prices for products are set daily).

Changes in the percentage of firms raising or lowering prices are a good predictor of inflation. Data collected in the first month of each quarter accurately anticipates reported inflation for the quarter. All in all, inflationary pressures appear to be easing as fewer firms raise their prices. Labor costs are also decreasing as fewer owners report increasing compensation, but not as quickly as price reductions. This makes inflation ‘sticky’.

Shreya Christina
Shreya has been with for 3 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider team, Shreya seeks to understand an audience before creating memorable, persuasive copy.

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