The effect that inflation is having on consumers’ wallets has been well documented, with estimates suggesting that the average U.S. household will spend an additional $5,200 this year compared to 2021.
But how is this environment of soaring prices affecting businesses—large and small?
Shoppers stopped to take a breath in February as consumer spending rose in February at a slower pace.
Personal consumption expenditures edged up 0.2 percent to $34.9 billion, falling short of the market estimate of 0.7 percent. However, when adjusted for inflation, spending tumbled 0.4 percent, according to data from the Bureau of Economic Analysis.
Following an impressive January, customers might be a little bit more cautious about exhausting their pandemic-era pent-up savings amid a surging consumer price index.
And this could eat into corporate revenues. But it’s not only consumer trends that are hurting business operations throughout the marketplace.
Inflation is top-of-mind for the U.S. private sector, according to business executives’ commentary compiled by Aiera, an event intelligence and insights platform. From rising labor costs to the global supply chain crisis, a broad array of inflationary pressures is affecting how businesses are operating in today’s economy, surveys show.
In an earnings call last month, Michael Witynski, president and CEO of Dollar Tree, confirmed that the company completed its rollout of the $1.25 price point at more than 7,800 stores. It also expanded its $3 and $5 offerings.
Tyson Foods has been pummeled by inflation and labor. Donnie King, president and CEO of Tyson, said in an earnings call, “We are seeing higher costs across our supply chain, including higher input costs, such as feed and ingredients.”
Advertising budgets are sliding too, according to Meta Platforms.
“We’re hearing from advertisers that macroeconomic challenges like cost inflation and supply chain disruptions are impacting advertiser budgets,” said David Wehner, CFO of Facebook.
But while larger entities can absorb these rising costs, it’s more challenging for smaller firms.
Kabbage, an online financial technology company owned by American Express, recently published its “Small Business Recovery Report,” which assessed trends and growth outlook for small businesses. The study revealed that one of the ways smaller companies are adapting to the latest trends in the marketplace is by raising prices.
The report highlighted that prices were raised by an average of 21 percent across multiple industries, primarily because of growing costs from vendors and raw materials.
Over the next six months, nearly two-thirds of businesses intend to keep these prices elevated. Nearly one-fifth (18 percent) plan to increase prices even more over this period.
Be it swelling internal costs or international supply chain issues, businesses are anticipating a bombardment of problems for the next three months to a year.
“Small businesses are preparing for a new type of market. One that’s not driven by the direct impact of COVID-19—but rather, one determined by the economic aftermath of the pandemic,” Kathryn Petralia, co-founder of Kabbage, said in a statement. “Economic indicators like inflation will require adjustments, but the new data illustrates how small businesses are making changes and adapting.”
The same concerns were spotlighted in Veem’s “State of Small Business” quarterly report. The business-to-business payment solutions firm found that 78 percent of more than 800 U.S.-based small business owners are facing inflationary pressures. These pressures are exacerbated by worldwide supply chain disruptions and worker shortages.
Jordan Erskine, president and co-founder at Dynamic Blending Specialists, told The Epoch Times that his firm has employed two measures: increase prices to accommodate and add more value for clients that could generate more revenue.
“Our suppliers, who do not offer us the same terms that we offer our clients, have raised pricing on raw materials 15 percent to 20 percent across the board. Every supplier. There’s no way around that, we’ve had to adapt and raise our prices as well,” Erskine said.
Despite some pushback from customers, Erskine said transparency has been key to the company’s pricing adjustments.
“When we show the client that our material costs just increased 20 percent, they usually are more at ease with the higher costs,” he said.
For many smaller outfits, it is about trying to do more with less, says Ben Johnston, the COO at Kapitus, a small business financing firm.
“One way small businesses do this is by generating efficiencies in labor and consumption,” he told The Epoch Times.
Restaurants may respond to the current labor shortage and surging wage inflation by trimming the responsibilities of personnel or installing QR codes at tables for customers to access online menus, Johnston said.
With sky-high oil and gas prices, shipping and delivery services are attempting to trim their energy expenses. This trend, Johnston says, has these companies maximize route efficiency and invest in energy-efficient technology, such as purchasing electric vehicles and installing greener HVAC units.
In the end, it will ultimately come down to how much consumers spend in the marketplace.
“Consumers are beginning to react to higher prices, but we have yet to see a large change in consumer behavior. Given strong employment numbers and wage growth, most U.S. consumers have the ability to spend,” Johnston said.
“However, rising prices and declining overall consumer sentiment are indicators that real consumer spending is likely to decline in the coming months. Given that the majority of small business revenue comes from consumer spending, weakening U.S. consumer demand could have a significant impact on small businesses.”
Meanwhile, business experts note a differentiation between companies that think inflation is transitory and organizations that don’t believe higher prices will be a short-lived phenomenon.
Those who think it’s transitory will hire more talent and introduce hiring bonuses, while businesses concerned about long-term inflation troubles will insource many of their operations, cutting costs from multiple suppliers.
Two years after COVID-19 directives shut down the economy and forced businesses to close their doors—many of them permanently—the small business community is now dealing with the new threat of inflation. Whether they can survive this ordeal remains to be seen.