Dive Brief:

• Two out of three (67%) small businesses have raised prices during the past 12 months and 85% are concerned about the persistence of the highest inflation in 40 years, according to a quarterly survey by the U.S. Chamber of Commerce and MetLife.
• In an effort to adjust to rising prices, four out of 10 (41%) small businesses have cut staff during the past year, while 39% have taken out a loan, according to the survey. One in three small business owners (33%) rank inflation as their No. 1 challenge, a 10 percentage point jump compared with the survey last quarter. 
• "Inflation is top of mind for small businesses as it continues to limit their purchasing power, forcing small businesses to raise their prices and absorb higher costs within already thin margins," according to Tom Sullivan, the U.S. Chamber's vice president for small business policy.

Dive Insight:

CFOs at companies of all sizes face increasing signs that high inflation is becoming entrenched, forcing a review of fundamental business planning including pricing, wages and capital allocation.

"Broad-based price increases have become normal across the economy," according to Neil Bradley, the chamber's chief policy officer and head of strategic advocacy. "Supply chain disruptions, energy prices and a persistent shortage of labor are all coming together at a time of sustained demand to force prices up."

The rising cost of inputs has prompted companies to pass on higher prices to consumers. The producer price index for final demand, a measure of what suppliers charge, soared 10% in February from the prior year as the pandemic continued to crimp supply chains in industries ranging from housing to technology to autos.

Meanwhile, the consumer price index (CPI) rose last month at a 7.9% annual rate, the fastest pace in four decades, according to the Labor Department.

"Larger companies can often delay price increases even when their input costs increase through efficiencies and reductions in margin," Bradley said, adding that such forbearance is usually more difficult for smaller companies.

“What we are seeing right now is that the inflationary pressures are so great and so broad-based that companies are being forced to raise prices regardless of their size,” Bradley said in an email response to questions.

Gas price surges, sparked by Russia's invasion of Ukraine in February, are also dealing small businesses a heavy blow. High prices at the pump have hurt 68% of small businesses, according to Alignable data, and 66% of restaurants report they are struggling due to gas costs. This uptick, combined with an inflated cost of goods, are pinching restaurants that are still recovering from pandemic disruption. 

Major brands are making adjustments to offset climbing costs. Chipotle, for example, disclosed in its Q4 2021 earnings call that its menu prices are about 10% higher than they were in 2020. Most recently, the chain increased menu prices 4% in December to offset high wage and food costs. 

This month expectations for inflation one year in the future rose to the highest level since 1981, according to a University of Michigan survey of consumer sentiment. Consumers expect their finances to worsen during the coming year by the biggest proportion since the mid-1940s.

"Prevention of inflationary psychology is much less costly before it becomes ingrained in the economic behavior of consumers and firms," according to Richard Curtain, chief economist for the University of Michigan survey.

"Confidence that economic policies can resolve the [inflation] problem is essential," he said. "Unfortunately, half of all consumers unfavorably assess current policies, more than three times the 16% who rated them favorably."

Inflation will probably slow in coming months as pandemic-induced disruptions in supply chains clear up, Federal Reserve Chair Jerome Powell said at a March 16 press conference after a meeting of central bank policymakers.

Fed officials forecast that their preferred inflation measure — the core personal consumption expenditures (PCE) price index — will decline to 4.1% by December from a 38-year high of 5.2% in January.

The Fed, citing price pressures, raised the federal funds rate on March 16 for the first time since 2018. It has set an inflation target of 2%.

The survey of small businesses underscores the magnitude of the inflation challenge, Bradley said. "The survey results confirm that inflation is broad-based, impacting every economic sector and is likely to persist much longer than originally anticipated."

Despite rising prices, small businesses said they are more confident about their outlook than at any time since the onset of the pandemic in early 2020, according to the survey.

"It is encouraging to see the steady rise in business confidence on Main Street, even as the latest survey was taken at the height of the omicron wave," Sullivan said. The survey of 750 small business owners and operators was conducted from Jan. 14 until Jan. 26.