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How Does Inflation Affect Your Small Business

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How Does Inflation Affect Your Small Business

You may have heard on the news that inflation may be higher than actually reported over the past year. The pandemic altered consumer expenditures, and our official index may not appropriately reflect these changes. Alberto Cavallo from Harvard updated the weights on each category in the Consumer Price Index (CPI). Cavallo finds that the annual adjusted inflation rate in April 2020 was actually 1.06 percent instead of the official 0.35 percent reported.

Consumer preferences and coronavirus restrictions have limited spending in certain categories like travel, dining and recreation, which have experienced deflation. 

While other categories such as food and housing have significantly increased. Many businesses have delayed reopening even when they are able because they expect demand to be depressed. 

Several recent indications suggest a strong rebound in sectors like travel, gasoline, retail and auto sales. The additional stimulus payments are also driving pent up demand.

The 2021 inflation rate is expected to be 2.5 percent according to Kiplinger. Small businesses need to understand what is happening in the economy and how it could affect your business.

How does high inflation affect the business? 

Inflation isn’t inherently good or bad; it depends on your perspective. You may be reluctant to increase prices and potentially lose customers, but inflation might mean a growth in activity in your sector. The level of inflation also plays a part in the good versus bad discussion. A little is often desirable, but too much can bring business to a halt.

What should you do?

The effects of inflation on small businesses

While inflation means that your dollars don’t go as far, it doesn’t necessarily mean you should increase prices. You may be able to balance increased costs with efficiencies. Consumers expect prices to rise over time. The key is to make small, manageable price increases that are easy for your consumer to incorporate into their budget. Here are some things you should consider during times of inflation:

  • Look at your productivity. Can you maintain the same level of productivity with less staff? This is especially key when labor costs are driving inflation.

  • Are there new technologies you should consider? Maybe you can automate production of a line or add a self-service kiosk to save on labor. 

  • Is there the potential to reduce material costs or expenses? You want to weigh these decisions very carefully because you don’t want to just go cheaper. You want quality materials to maintain your quality product which ultimately affects your business reputation.

These measures can help you hold off raising prices, but there will come a time when you must increase prices. It’s always important to follow your closest competitors to see how they are handling inflation. 

It is also important to maintain transparency with your customers and be sensitive to their needs as well. Be upfront and let them know why you’re raising prices. Let them know in advance so they can prepare for the price increase. If you do these things, your customer is more likely to stay loyal to your business and understand the reasons for your price increase.

The pace of recovery remains uncertain, but things appear to be looking up with vaccinations happening in the United States. Of course, we still need to be wary of new strains and maintain safe practices in the near future.

We lived through a prolonged period of low inflation and growth before the pandemic hit. The pandemic affected each of our businesses differently. Prices are going to rise and it’s important that we plan for inflation.

This is the effect of inflation on small businesses! If you would like help with your pricing strategy, we’re here to help. Outlook Business Solutions offers an array of marketing and sales services from strategy planning to copywriting and public relations. We’re here to help you grow your business and inspire your customers.