Whether you read or watch the news or just pay attention to the prices from your suppliers and requests for bigger raises from your employees, you know that inflation is significantly higher than most of the last 10+ years. I understand why some of you would be concerned. For many of you, you’ve not owned or run a business in a period with inflation like it is today. So, what should you do?
Although I was an economics major in college, I do not consider myself an economist. Even if I were truly an economist, I don’t think I nor anybody else can truly know or advise you exactly what to do, but I do have some thoughts to share that I hope you will find valuable.
- Having grown up in the inflationary 1970s and been in the business office of companies since the mid-1980s, I can clearly see that today’s inflation is caused by the lack of workers and supply chain issues for goods (which themselves are mostly caused by labor shortages.) Thus, if the entire US, if not worldwide economy, is well-managed (a big if, or course) there is a decent chance that today’s inflation will be short-term.
- At a microeconomic level, (think “your business, your costs, your prices to customers and what you pay your employees”), you must react. If you’re not willing to pay higher (hopefully on a short-term basis) prices to your vendors, you may not have anything to make or resell to your customers. And even if you have the cash to survive significant drops in revenue, do you want to give your customers any excuse to look for and start working with a competitor? As for employees, generally speaking, you don’t want to lose any of them unless the “demanded” wage increase just doesn’t make sense in any economic environment.
- Inflation can easily feed oxygen and gasoline to itself causing it to get worse and last a long time. This happens when companies give employees bigger raises than the time before because of a common expectation that inflation will continue to go up. The same goes for the prices of goods and services. When companies raise prices to their business customers, those businesses turnaround and charge more for their goods and services. When those higher prices hit consumers, they demand higher wages. Some of you may remember that at the end of Jimmy Carter’s presidency (Jan 1981) inflation was very high and showed no signs of abating. One of the reason’s Ronald Reagan won the presidency in 1980 was because of his economic plans to deal with inflation (which they also called stagflation because the economy was not growing either.) Whether you agreed with his economic policy or not, it essentially stifled inflation—though with a lot of economic pain. I wholeheartedly hope that we (and that’s a super-collective “we”) can avoid that type of situation.
It comes down to whether you’re going to raise your prices, if so, by how much and for how long. Here are a few things to consider:
- If the higher costs of goods and/or employees is going to make your products at existing prices less profitable, consider a price increase. If those costs are going up permanently, your price increase might need to be permanent, but if they are temporary, you should consider a temporary price increase. Keeping the increased prices in place after your costs have gone down will increase your profit margins over what they were before inflation hit. However, you may also find yourself with prices that are higher than your competitors causing sales to shift to your competitors and your company’s profits to decrease.
- You may also suffer from increased overhead costs (supplies, services and employees) that do not factor in to making or providing the product. Certainly, you will want to consider whether and how much you can increase your prices, potentially above and beyond the increases necessary to maintain the same gross profit margin. Again, you must consider how much price increase your customers can or will absorb before looking for less expensive prices from your competitors.
Lastly, I ask you to consider the long-term greater good of the US economy. While no one company, save maybe Amazon, can impact the amount of inflation a year from now, it’s possible that if most firms limit their price increases, the collective “we” can avoid years of high inflation.