Industry Insight from Renewal Logistics
Solopreneur's Guide to Inflation
In May inflation hit 8.6%, the highest it's been since 1980
In May, the U.S. annual inflation rate hit 8.6%. This means that prices for goods across the country were, on average, 8.6% higher than they were in May of last year. If you purchased a car for $20,000 last year, the same car could be selling for $21,720 this year – a notable price increase!
In the news, we see a lot of coverage about families struggling to afford their usual groceries and workers paying exorbitant prices for gas to commute to work. Farther up the supply chain, inflation is hitting small businesses hard too.
Getting to The Bottom of It:
What's Causing Inflation
Inflation is currently at its highest rate since the oil crisis of 1980. The reason it is so high right now is that there are multiple contributing factors! When understanding a current economic trend, we must analyze the situation while we are still experiencing it, which is difficult, even for our best economists. However, the following factors are likely contributing to high inflation in 2022:
War in Ukraine
Following Russia’s invasion of Ukraine, countries around the world placed restrictions on imports from Russia. Since Russia is the world’s third largest supplier of oil, this cut back on the global supply, causing energy prices to rise.
Additionally, Russia and Ukraine both number among the top 10 global suppliers of wheat, a staple food in many countries. With sanctions, destruction from the war, and blocked ports, little wheat has been exported from the area, causing the supply to shrink and wheat prices to rise.
Government Spending Surge
Governments across the world took part in massive spending surges during the Covid-19 pandemic. The United States government issued stimulus checks of $1,200 to each person. This influx of cash into the economy contributed some to rising prices.
Rise in Consumer Demand
While some families desperately needed stimulus checks to get by while their jobs were terminated by pandemic conditions, others counted it as bonus spending money. With nowhere to go, people in lockdown took online spending sprees.
Disruptions to Global Supply Chain
While consumer demand rocketed, global supply chains were unable to keep up, especially considering tight lockdowns in high-export countries like China. With Covid-19 infections ramping up in 2021, a worker shortage also made it difficult to ship goods out quickly. Many companies increased both wages and prices.
As people begin moving about again, there is suddenly a high demand for gas among consumers who want to drive to new places or are returning to work. Along with suppliers who work to meet consumer demand for goods, consumers are now using more gas too. Since the supply is so limited, prices have increased further.
Climate Change and Extreme Weather Events
This year, India, China, and Bangladesh have experienced unprecedented levels of flooding during monsoon season. This has disrupted food production and the production of other consumer goods that are exported in high volume from these countries. In concert with rising consumer demand the shock to supply of goods from the region causes prices to rise.
Similarly, warmer temperatures have taken a toll on American crops, particularly corn and wheat, due to the increase in pest damage and the need for more watering.
With these challenges to food supply, food prices have risen.
Close to Home:
What Inflation Means for Solopreneurs and Small Businesses
While inflation rose to 8.6% for consumer goods, wholesale prices increased by 10.8% between May of 2021 and May of 2022, which means small businesses are paying a hefty price tag for factory orders, shipping materials, and logistics services.
In a CNBC|SurveyMonkey survey of small business owners, 75% reported rising costs for their supplies. 38% of those surveyed reported that inflation was currently the number one risk to their business.
Small business owners and solopreneurs are constantly thinking on their toes – even during more stable economic periods. Today, many are wondering how to keep their business afloat and continue to bring in profit while their costs rise quickly. Should you raise prices of your products in order to offset higher costs? Or should you keep prices low to keep customers who may be struggling with their own costs of living?
In the CNBC|SurveyMonkey survey, 17% of small business owners thought it was a good time to raise prices, while 35% did not think so. Nearly half saw upsides and downsides to raising prices now. A major upside would be relieving some of the squeeze on profit caused by high costs, while a notable downside is the burden a price increase places upon customers.
The impact that inflation has on your business depends on the way you react to it. It also depends on the type of product you sell. Goods that are energy-intensive in their production or require shipment from overseas are likely to be more impacted by inflation – specifically by high gas prices.
Companies Hit Hard By Inflation
- Those that sell energy-intensive products
Paper goods and products made with metal require a lot of energy to manufacture. With rising energy costs, these goods become more expensive to purchase from vendors.
- Those that import from overseas
Shipping rates rose by 22% from May 2021 to May 2022 and are expected to remain elevated into 2023, according to the IMF. High transportation costs (along with interruptions to the global supply chain) will take a toll on companies that import goods from overseas.
- Luxury goods
With high prices across sectors, consumers are having to spend more of their paychecks on costs of living like food, toiletries, and home goods. That means many don’t have room in their budget for a big splurge on luxury goods like high-end watches or designer shoes.
- Consumer durables
Most consumers think about making a big purchase for weeks or months before finally taking the leap. Consumer durables like washing machines, electronics, refrigerators, couches, AC units, and mattresses do need to be replaced every few years. However, they are durable, which means consumers can usually hold off on buying a new one until they are ready. With inflation so high, now is not the time they are choosing for these big purchases. According to a University of Michigan survey, 57% of respondents thought it was a bad time to purchase consumer durables.
Companies Less Impacted By Inflation
- Consumer staples
Companies that sell staples like hygiene products, health goods, household goods, cleaning supplies, food and some types of clothing are less likely to see a drop off in orders. That’s because their customers have often incorporated these consumer staples into their routines so fully that a slight price increase won’t deter them from buying more. These consumer staples also need to be replenished more frequently so customers are unlikely to wait until prices go down, which could take months or more.
- Companies with very low operating costs
The benefit that solopreneurs and small businesses have over big box stores is that their small operations are often slim, with fewer big costs to worry about. Craftspeople who work out of their homes using local materials may not view inflation as such a big hurdle.
Guidance from Renewal Logistics
What to Do About Inflation
As a small business owner or solopreneur, you have a lot of decision-making power at your fingertips. Sometimes this power is freeing and exciting, but when challenges like high inflation arise, it can be daunting. How can you make the right decision for your business when the whole economy is experiencing unprecedented conditions?
Instead of stressing out, we recommend you take this as an opportunity to analyze your operation with a magnifying glass and fine-toothed comb. Find ways to save costs that you might now have thought of if you didn’t have to. Below are a few steps you can take to weather inflation and improve the efficiency of your operation at the same time:
1. Find Opportunities to Use Automation
Especially when workers are hard to come by, automation tools can be very useful in managing daily business operations. The market is packed with software used for all types of automation and, oftentimes these products are not even too pricey. Think of the tasks that you wish you could offload and then do a search to see if there is an automation solution available.
2. Cut Expenses Where Feasible
While we did just sing the praises of nifty software packages, there is such a thing as having too many software tools – especially when they are expensive and underused. Evaluate the monthly subscriptions you pay for and see if there are any that haven’t improved productivity or efficiency in the past year.
We’ve also seen a trend where businesses are letting go of their brick and mortar leases, allowing their employees to work from home, and sending their goods to a third party warehouse, in order to cut overhead costs. Depending on the size of your business and amount of products you sell, this might be helpful for Solopreneurs to consider as well.
3. Consider Raising Prices
Most small business owners dislike the idea of raising their prices, but under the current economic conditions you just may have to. According to a CNBC|SurveyMonkey survey, 40% of small business owners are already raising prices in response to inflation, while another 35% plan to do so if inflation continues.
4. Review Profit Margins for Each Product or Service
Depending on the variety of products or services you offer, you may find inflation hitting certain offerings more than others. Are you able to raise prices on particular goods that have become pricier for you? You may be able to lower prices or promote another item that doesn’t cost you quite so much.
5. Optimize the Efficiency for Your Operation
Sticking to a tight system for order processing, shipment, and inventory management is key to operating on a budget. If this is too much for you to manage on your own, you may consider working with a 3PL company that specializes in working with small businesses. Renewal Logistics has a number of fulfillment and warehousing options that may work well for you and even save you money on operating costs.
Will Inflation Continue?
For several months, government officials predicted that inflation would be transitory. However, we have now experienced a full year of inflation outside the normal range of 2-4% and most everyone has caught on to the fact that this is a longer-term issue.
However, on June 15th, the Federal Reserve raised interest rates by 0.75 points – the largest hike since 1994. This is one of the most influential actions the government can take in curbing inflation, and is expected to begin a slow-down in price increases. They are expected to enact additional rate hikes as the year goes on.
At this point, many analysts believe that the inflation rate has peaked at 8.6% and will return to normal in 2023. However, the fact remains that factors like extreme weather, Covid-19, and international conflicts are difficult to predict and may have unexpected impacts on inflation.
Right now, small businesses should adjust their operations under the assumption that inflation will not be going away tomorrow. However, we can certainly hope that conditions stabilize by next year. And in the meantime, we can all take this opportunity to ramp up efficiency and take time to analyze our operations.
Questions About Operating a Small Business During Unprecedented Times?
We’d love to talk. At Renewal Logistics we pride ourselves on working as a partner in efficiency and success with small businesses of all sorts. Let us know what you’re struggling with or just reach out to chat. We’re always happy to brainstorm!