What Businesses Can Expect to See with Inflation This Year

Given the current environment, U.S. small business should review their dependencies on imported goods and research domestic alternatives.

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Inflation seems to be appearing everywhere for small businesses. Contractors have seen the cost of lumber increase in excess of 200% over the past year. Dramatic increases in freight rates from Asia are increasing costs to retailers, while spikes in wheat, coffee, sugar, soybeans and corn are driving up costs to restaurants and families alike. At the same time, increases in the cost of gasoline and natural gas mean that transporting goods and providing on-site services is getting more expensive. Surging customer demand means that small businesses have largely been able to pass these costs on to consumers, but continued increases could have a negative effect on growth.

Fortunately, much of the inflation pressure currently in the market is temporary. The Coronavirus disease (COVID-19) caused significant disruptions to the supply chain, creating shortages of certain raw materials and component parts. At the same time, the pandemic caused consumers to delay certain purchases and rethink how they spend money. As the pandemic ends, consumers are making up for lost time, traveling, eating out, buying clothes and shopping for their homes where they may be spending more time as more work is done remotely. Given these changes in consumer spending, it will take time for the supply chain, which scaled back significantly at the start of the pandemic, to bounce back and meet demand.  However, over the course of the next year, the supply chain will rise to meet demand and much of the inflation will subside.

The important role the global supply chain is playing in inflation

Given that so many of the raw materials and finished goods that U.S. small businesses source are produced abroad, the health of the global supply chain is of particular importance. In March, the U.S. trade deficit widened to its largest point ever, emphasizing the extent to which U.S. business depends on overseas production. Given recent supply chain disruptions, rising import tariffs and concerns surrounding intellectual property theft and worker treatment in foreign manufacturing facilities, many American small businesses are now looking for domestic production alternatives.  

How consumer spending is impacting inflation and supply chain challenges

The April 2021 retail sales report from the U.S. Census showed a large year-over-year increase in sales, as much of the country was in some stage of lockdown during April 2020. However, comparing April 2021 to March 2021 were less clear. Spending in April increased significantly at restaurants and bars as more Americans received vaccinations and local restrictions on gatherings were lifted. Auto dealers also saw large month-over-month gains as did electronics retailers and health and personal care stores, indicating consumers desire to travel, host and invest in themselves.

Interestingly, spending on clothing and general merchandise, building materials and home furnishings, while up considerably year over year, fell month over month. These categories will be important to monitor going forward as an indicator of how consumer spending has changed in a post-pandemic world. Prices in most, if not all, of these categories have increased year over year, some such as automotive and building supplies by wide margins, so pricing may be beginning to impact demand.

What businesses can do to protect themselves financially

Given the current environment, U.S. small business should review their dependencies on imported goods and research domestic alternatives. In many cases domestic production may seem cost prohibitive, but it is important to weigh the cost of potential disruption, lag times and intellectual property security in this equation. It is also worth exploring the potential value of being able to confidently say “made in America” or “ethically sourced” when selling your product and whether customers will pay more for this knowledge.