Small businesses rarely increase their prices without a good reason on the cost side. If a business simply raises the prices of its products or services, customers will notice and go to lower cost businesses with the same deals. But when they are all faced with the same cost issues (for example, an increase in taxes or the minimum wage or energy prices), survival compels them to act, and the most common response is to increase the prices and to pass these costs on to their customers.

In a December survey, 70% of small business owners said they had raised their average selling prices in recent months. Of those raising prices, 30% blamed rising supply and inventory costs and rising labor costs, 46% only identified increases in supply and inventory costs, and 7 % attributed labor costs as the reason for the price increases. Seventeen cited other cost factors as the reason. Although supply chain issues have become less severe as stocks have become more available, prices have yet to return to pre-Covid levels, and likely won’t in the future.

With so many companies raising their prices, inflation is rife. At 1.5% in 2020, the inflation rate rose to 9% before starting to moderate in the last half year. But overall, the rate is still well above the Federal Reserve Bank’s 2% target. Over 40% of owners reported price increases of 10% or more. Sixty-nine percent raised 5% or more.

To date, supply chain issues have played a major role in driving inflation. The resulting shortage of “things” to buy, coupled with consumers receiving government money, certainly drove up prices. As a result, consumers paid more but got less. Auto and house prices have surged, driving the inflationary burden of goods that spend little time on the shelf before being sold.

A major supply-side problem was (and still is) the shortage of workers, forcing companies to raise wages to retain and attract needed employees. These costs have also been passed on to consumers and are now beginning to dominate the inflation debate. It’s simple to cut selling prices as costs come down, but asking the workforce to take a pay cut is a whole different matter, and labor costs are the biggest cost of doing business. important for most small businesses. This makes inflation “sticky”, especially in the services sector.

Price increases of 10% or more are definitely “inflationary”, especially when the policy target is 2% headline inflation. Finance and real estate companies lead the pack, with 83% reporting price increases of 10% or more. House prices rose, as did business mortgage rates, due to Fed rate hikes. Next come construction and manufacturing companies, with 61% and 52% respectively reporting increases of 10% or more. Non-professional service businesses, 27% (restaurants and bars only 19%), reported the least frequent significant price increases.

Overall, shortages (of products and labour) have so far been the main driver of price increases. It was the expectation that product shortages would be quickly resolved that led to predictions that inflation would be temporary. However, supply issues have been slow to resolve and persistent. Then, labor shortages became a major cost driver, with reports of pay rises hitting record highs. The result is inflation that is sticky and hard to beat through interest rate hikes, especially when government revenue injections continue to support spending. Only 20% of all businesses say higher interest rates have a major impact on their business, primarily in finance and real estate.

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