Inflationary economic shock ends as Main Street tipping point reached

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The latest CPI reading, the highest in four decades, is not the only sign that inflation is expanding rather than relinquishing its grip on the US economy in 2022. costs to customers, or will soon be forced to make this decision.

While the 74% of small business owners who say they are experiencing rising supply costs are virtually unchanged from the fourth quarter of 2021, according to new CNBC/SurveyMonkey small business research, the number of businesses passing costs on to customers has risen to 47% in the first quarter compared to 39% in the fourth quarter of 2021. And another 32% say they will have to raise prices soon if inflation continues. Sticky inflation is their expectation. More than 80% of small business owners expect inflation to still be a problem six months from now (55% say it’s “highly likely”). CNBC|SurveyMonkey data.

Main Street’s concerns about inflation are tied to the prospects for small businesses in the supply chain, with 75% saying the issues are likely to be a problem in six months. And there is no faith in politicians: 71% of small business owners are unsure of the Federal Reserve’s ability to control inflation.

The CNBC/SurveyMonkey online survey was conducted January 24-30, 2022 among 2,227 small business owners nationwide.

“The main problem with inflation is that there is no end in sight,” said Laura Wronsky, senior research manager at Momentive, who conducts the poll for CNBC. “We have become accustomed to the rise and fall of the waves of Covid and businesses have had time to rewrite their scripts to accommodate them. But no one knows how fast and to what extent inflation will continue to rise, so the unpredictability is causing some concern. she said, with distrust of the Fed adding to the uncertainty.

“I don’t think things are getting better. Things have gotten worse,” said Michelle Pusateri, owner of Nana Joes Granola in San Francisco.

Nana Jos Granola has witnessed a boom in business during Covid as demand for packaged goods soared, but the business landscape has changed: the hypergrowth seen earlier during the pandemic is now overwhelmed by supply chain and pricing issues, and its margins have shrunk.

Nana Joes Granola stocked ingredients and bought them in bulk to get lower prices as demand outpaced supply and logistical problems escalated. Pusateri said the increase in inventories is now “rather a temporary measure,” but she expects it will likely become a long-term problem for the business. At the end of 2019, her firm had $94,000 in inventory, but by the end of last year it had grown to $327,000.

“I think more and more businesses will have to sit on more inventory,” Pusateri said.

Losing leverage as buyers in a broken supply chain

In many ways, small business owners have lost leverage with suppliers. Transactions prioritize large buyers, and small buyers can no longer order smaller quantities (such as half a pallet) or rely on negotiated prices.

“Many ingredients are in high demand, which means that farmers, vendors and brokers can name their price. They can wait until the last one offers the highest bidder,” said Pusateri, community member of Goldman Sachs 10,000 Small Businesses Voices. Among this Main Street sample, 84% indicated Recent Poll that inflation for them has worsened since September, with only 13% believing that supply chain problems will subside in the first half of 2022.

Nana Joes Granola’s main ingredient, oats, has risen in price significantly and Pusateri does not expect any downward pricing pressure given current supply and demand levels.

It is not only a matter of increasing costs, but also the magnitude of this increase, which hits small companies. Eric Groves, co-founder and CEO of online small business platform Alignable, which tracking the impact of inflation, indicates the percentage of businesses that report the highest level of cost growth. Overall, 78% of small businesses say their costs are above pre-pandemic levels, but the largest group of small businesses (29%) say they are seeing their resource prices rise by 25% or more.

All the headlines about inflation will make it easier for small business owners to increase costs and not cause backlash from customers as they might expect, but while more than 50% of businesses pass on the increase in costs to customers, only 9% report it to Alignable. they can do so at a level where it is above breakeven for them.

“Costs have gone up more than their ability to pass them down, and that’s what’s critical to the recovery,” Groves said. “That’s where the feeling of stress comes from. This is squeezing out margins, not just income … what goes into their pocket, ”he added.

This is a fraught situation for small businesses trying to figure out how much they can afford to charge without the risk of shrinking customers and losing regular revenue as many small businesses have yet to fully recover from the Covid shock. Alignable data shows that roughly 35-37% of businesses say 90% or more of their pre-pandemic customers have returned.

Small business owners tend to be inherently optimistic, but Alignable data shows they are now more pessimistic about their own recovery timelines. Last June, small business owners expected revenues to return to pre-pandemic levels by mid-2022. Now this indicator has been postponed for a whole year, until mid-2023.

Pusateri says inflation is starting to dampen demand for her company’s muesli, which is in the premium food category. “People are starting to look at what they spend on. For us, it’s more people who are starting to really look at wallets,” she said.

Small business says it’s ‘stuck in inflation’

NFIB latest quarterly survey found that the percentage of small business owners who have to raise prices is over 60%, the highest in NFIB data since the fourth quarter of 1974.

“They are suffering from supply chain disruptions, inflation and labor shortages, and have had to reinvent themselves several times over the last few years and are running out of options,” said Kevin Kuhlmann, head of government relations at the NFIB. . “They keep adjusting… but you can only raise prices before you see losses,” he said.

Nana Jos Granola has accessed a Covid Economic Impact Loan from the Small Business Administration to fund a higher level of inventory purchases, but that funding program ended in 2021 and there is no sign the federal government will reinstate it. Pusateri said she now has to consider business loans or attract investors, which she has never had to do before.

“There are not many policy options on issues like inflation and the supply chain,” Kuhlmann said. And even if inflation is contained, this does not mean that prices will decline. “It’s kind of the new normal,” he said. “You want to slow down the rise in prices. It’s frustrating for business owners.”

Small business tends to be a lagging rather than a leading indicator of the economy, but rising fears on Main Street are “a worrying sign that inflation will be more resilient,” said Mark Zandi, chief economist at Moody’s Analytics.

“Their pricing decisions tend to lag behind their larger competitors, so if smaller businesses are raising prices more aggressively, it could signal that inflation is becoming more endemic,” Zandi said. And since small businesses typically don’t see themselves as having price power over the long term, if they are “getting bolder,” it’s evidence that inflationary pressures are on a broader basis, he added.

Trust from the main street and support for Biden

The CNBC/SurveyMonkey Small Business Confidence Index continues to hover around an all-time low, holding at 44 out of 100, unchanged from Q4 2021 and nearly identical to the all-time low 43 years ago. Overall, the outlook for the business is mixed, with 46% of Main Street businesses expecting revenue growth over the next 12 months, according to CNBC|SurveyMonkey.

Politics is a big factor: Only 33% of business owners say conditions are “good,” which is the same as 33% of business owners who say they support President Biden.

The percentage of Democrats who expressed support for Biden remains very high, at 83%, but it has fallen by six percentage points this quarter. Just under half (49%) of Democratic small business owners said conditions were good. Most Democrats expect inflation to still be a problem six months from now (67%), but that’s significantly less than the 92% of Republicans who believe inflation won’t go away. And Democrats are much more likely to believe the Fed can control inflation: 61% versus 11% of Republicans polled.

Some sectors in the small business community that are more exposed to the global supply chain are facing more pressure, and there are positive signs in the business landscape. In general, companies do a good job of passing costs on to customers with the same high corporate rate of return as they did during World War II, but the benefits of price power are more likely to go to the largest corporations.

Small businesses typically don’t have high levels of cash reserves – according to Alignable, that’s an average of 34 days of cash on hand – leading to a situation where any financial hit is very difficult to recover. “So as they try to get back into the post-Covid recovery, every little extra margin they can get is critical, and with costs rising and being impossible to get past, we will see more and more businesses struggling with that.” Groves said.

A key indicator of business health is business-to-business payment transactions that show no signs of stress, even companies with 500 or fewer employees pay bills on time. “At least as long as they manage,” Zandi said.

Small business sentiment, like consumer sentiment, tends to be reactive and based on the latest information or anecdote rather than long-term forecasts, meaning that current gas and fuel prices, which can be a major input for small businesses, may lead to a more dramatic change in sentiment in the short term. But Zandi said at least the latest data from Main Street is “proof we have a problem.”

Pusateri has described herself as “much less confident now” after experiencing Covid and even seeing hypergrowth during the early part of the pandemic. “I thought I lived through 2020, ‘Oh my God, we made it.’ We were still profitable. And all of a sudden I couldn’t find the ingredients.”

Nana Joes Granola has gone from a 135% profit growth during the packaged food boom to its current break-even point in a pricing environment hitting it from all sides. In addition to supply issues, rising wages and a lack of leverage as a buyer, shipping costs across the country have risen and the company has had to change its free shipping policy for its direct consumer business. “We are being turned over. Everywhere I look, prices go up,” Pusateri said.

The financial market and economists, including Zandi, expect inflation to ease later in 2022, but if that doesn’t happen soon, he said, “small business owners will be right.”

“I don’t think inflation will stop anytime soon,” Pusateri said. “We’ll be stuck in this.”

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