Inflation and the Ripple Effect:
What Business Owners Need to Know

  • Demand is outpacing supply and prices are rising.

  • Labor shortages and supply chain costs are the biggest factors behind the inflation today.

  • 4 ways business owners can navigate this economic recovery.
  • Mon Jun 21 13:04:00 EDT 2021

    “Americans spent more in April than they did in March – and bought less.” Excerpt from a recent article in The Wall Street Journal

    Trying to predict the direction of the U.S. economy over the past 18 months has been the equivalent of throwing darts at a dartboard…in the dark.

    We were initially told that the economy was going to shut down for two weeks to wipe out COVID. The next step was “two waves” of the pandemic which became one big wave. Employees were told to stay home, kids took classes via Zoom, and the economy did its best to pivot in a different direction.

    Lumber mills shut down for months, auto plants started making ventilators, and rental car companies sold their inventories out of fear of a multi-year recession. By the end of 2020, people were told to brace for a second year of living, and surviving, during the pandemic.

    But then we got some good news. As the country welcomed 2021, we had not one, but two vaccines. And soon after, a third vaccine was introduced, and millions of Americans were getting their shots. Still, we were told, it was going to be a sluggish recovery that would take years.

    And then the economy opened, and the federal government told Americans they planned to infuse almost $2 trillion into every segment of the recovering economy, on top of the trillions of dollars they injected (or allocated?) in 2020. Suddenly, people were shopping in stores and going to restaurants, baseball games, and on vacation. In May, many states told residents that they didn’t have to wear masks anymore. The U.S. economy went from 70 mph in January 2020 to 5 mph in November 2020, and back up to 50 mph in May 2021.

    Unfortunately, putting the economy’s pedal to the metal so quickly has caught many companies off guard. Demand for many products and services is far outpacing supply, and prices on almost everything are skyrocketing. For millions of business owners, inflation is a scary word! Their variable costs are rising weekly. They have little choice but to pass along the increases to consumers. However, they fear that larger competitors may keep prices low and drive them out of business. Small business owners are also struggling with supply chain issues – getting the inventory they need to stock their shelves, restaurants, and e-commerce stores.

    What are some of the biggest factors behind the inflation fears in our economy today? Here are four of them:

    Production Constraints – As I mentioned earlier, many businesses made decisions in 2020 as if the recession was going to last at least several years. As a result, automotive companies have over $1 billion worth of cars and trucks completely assembled but missing a key semi-conductor chip (the U.S. once produced 37% of the world’s semi-conductor chips; today, it produces 12% of the chips). Lumber mills were closed for several months in 2020. In 2021, the price of lumber (and most other building materials) is up almost 200%.

    Labor Shortages – The recovery has been deeply hampered by the lack of workers to fill hourly jobs. An aging workforce in certain key sectors, and the lack of skilled labor in manufacturing and healthcare, among other industries, have contributed to open jobs not being filled. Additionally, the federal government’s $300 weekly unemployment stimulus program, on top of regular unemployment, currently pays workers more money not to work than employers would pay them to work 40 hours/week. The ripple effect can be felt in every single industry. Supply chains have slowed to a crawl without dock workers and truckers. Retail stores and restaurants have employees working double shifts to help meet customer demand.  In May, Governors in 21 states announced that they will end the federal unemployment stimulus program in their states in June and July to bring employees back to work (the fed program is scheduled to run into September). Our latest BOXpollTM survey notes, “It may be the conundrum of the year: massive unemployment paired with…labor shortages.

    Higher Transportation/Supply Chain Costs – With labor shortages and production constraints, supply chain costs have gone up at almost every stop. For many businesses, the variable costs associated with supply chain can quickly turn a profit into a loss. For example, rising fuel prices are wreaking havoc on the bottom line of trucking companies. It’s imperative for owners to stay on top of ALL variable costs on a daily to weekly basis.

    Cyberattacks – In 2021, there have been two notable cyberattacks that wreaked havoc on the oil and beef industries, affecting Colonial Pipeline (100 million barrels/day), and JBS (the largest beef producer in the world. They handle 25% of all U.S. beef, and 20% of all U.S. pork) felt the weight of having production cut dramatically when hackers shut down their computer systems. The attacks resulted in spikes at the gas pumps, and prices soaring in supermarkets and restaurants for beef and pork (that’s already priced higher than it was in 2020).  Experts predict this to be an area that is likely to get worse rather than better in the immediate future.

    What does all this mean for business owners today? What steps can they take in 2021 as they try to navigate the murky waters of our economic recovery? Here are four suggestions: 

      1) Monitor Variable Costs regularly (daily in some cases!)
      2) Double Down on Good Deals
      3) Find Alternative Suppliers
      4) Consider using financing for expensive purchases such as new equipment or technology upgrades

    For business owners that rejoiced in the reopening of America’s economy, the ripple effect of inflation serves as a stark warning that we are not out of the woods just yet. Continue to monitor your business with the knowledge that things can, and probably will, change on a dime from week to week. Have your plan of action ready so you can respond to whatever challenges each new week brings to you and keep an eye on your cash flow.