Paying extra close attention to operating margins and finding ways to reduce expenses such as supplies and labor are tried and true methods for fighting inflation that could be harder during a labor shortage. Photo by elnaz asadi via Unsplash.com
Written by Frank Lopez
As the economy recovers from the Covid-19 pandemic, there is another economic woe that is on the rise — inflation.
According to the U.S. Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9% in June after rising 0.6% in May, the largest 1-month change since June 2008 when the index rose 1%.
A major contributor to the rising price index has been sales for used cars and trucks. That index increased 10.5% in June, accounting for more than one-third of the seasonally adjusted increase of all items.
Mark Vitner, a managing director and senior economist for Well’s Fargo’s Corporate and Investment Bank, said that while current inflation trends are worse than expected — and might persist longer than originally thought — it will not be close to historical periods of U.S. inflation from past decades.
“We are not likely to see a return of the runaway inflation that we saw in the late 1970s and early 1980s,” Vitner said.
In the 1970s, expectations for inflation took off without any idea of how high it would go, but with more regulation from the federal government and Federal Reserve Bank policies, inflation retreated.
Experts agree there’s reason to believe this period of inflation is temporary as well.
“Most of the run up in inflation that we are seeing is due to some temporary supply shortages and bottlenecks in the supply process because one or two key parts are messing, such as semi-conductor chips,” Vitner said.
Lingering fears over Covid-19 in the workplace have also contributed to slows in the production process.
Over the next year or perhaps 18 months, inflation is likely to remain elevated because of commonplace supply shortages — there is no way getting around that, Vitner said.
While inflation is expected to persist over the next 12 to 18 months, its not likely to become a major problem for the overall economy.
When stimulus money was being sent out, there was an increase in the sale of goods, but in the last few weeks, as the economy continues to open, consumers are pivoting to more service-based spending such as dining out and travel.
But it will become a significant problem for local businesses, especially small businesses that have fewer options for cutting costs and have a harder time passing off increased costs to consumers, Vitner said.
“All throughout small business we are seeing a drop in small business optimism in the last few months, “Vitner said. “Their costs are rising faster than their ability to pass them on to their end consumers.”
Any business owner that is able to pass on its increased costs to consumers will do just that, said Antonio Avalos, an economics professor and chair of the department of economics at Fresno State.
Regular consumers will feel the hit to their pockets as prices continue to increase, but with a pent-up demand for various goods and services since the onset of the pandemic, many consumers will be willing to pay those higher prices.
“Right now we are seeing a rebound that is producing unexpected increase in prices, but it isn’t sustainable,” Avalos said. “As soon as suppliers are able to get their acts together and rebuild supply channels, the pressure on the supply side will diminish and the cash that we have accumulated will run out, so I do expect some stability in the near future.”
Avalos said that with the 5.4% inflation rate of the last 12 months, the U.S. is nowhere near hyper-inflation levels.
For local companies that are seeing a rise in cost for goods that are used for their daily operation and production activities, inflation will cause higher operation costs that will reduce profit margins. However, businesses that produce goods to be sold might see the benefit of higher prices for goods.
While it is always important for a business to stick to a budget, it’s even more important during periods of inflation.
Roland Roos, CPA and president at Roos & McNabbs CPA’s in Fresno, said he is seeing a lot of concerns from clients in the real estate industry regarding increased prices for materials for homes and buildings, as well his restaurant clients for supplies and foods.
Because of the labor shortage, Roos said there are pressures put on businesses to increase wages, offer more benefits and adjust other job benefits to attract talent — another cost added to inflationary increases.
“The volume of business is certainly going up, but in some cases their margins have actually shrunk because of inflationary pressures on their costs of goods and labor,” said Roos.
Roos advises his clients to watch their budgets very carefully and make sure their margins don’t shrink to where they are not making profit.
It is also important for a business to pass along cost increases as best as it can to where the competitive market allows.
Some of the first steps that a business takes when attempting to cut expenses is analyze their labor costs, costs of goods, and possibly buy supplies before expected prices increases occur.
As many businesses did in the last year and a half, Roos said many of his clients are shifting to online services and delivery services for the very first time, especially those in the food industry.
While there are not expectations of hyper-inflation in the U.S., Roos said businesses are still in a state of apprehension in what assistance the government could provide.
“There is still a level of uncertainty, amongst clients — especially small businesses — as to how much additional assistance the government is going to provide. It’s certainly working against businesses because the labor shortage has resulted from people getting subsidies or assistance from federal and state government, which works as disincentive to get people back to work,” Roos said.