What Causes Inflation & How Does It Impact Your Small Business?

Currently, the US inflation rate is the highest it has been in over 30 years. The October consumer price index, which measures changes in the cost of food, housing, gasoline, utilities, and other goods, jumped by 6.2% over the past 12 months. What causes inflation in the first place?

In economics, inflation is the price of goods and services over a period of time. These pricing increases lessen the value of the dollar. Meaning the money saved today will be worth less tomorrow. This often contributes to raising the overall cost of living for citizens everywhere.

Fueled by post-pandemic shopping demand and labor shortages, increased energy costs, and volatile global weather patterns, inflation has many wondering when we should start to worry. 

Supply and Demand

The US continues to recover from the pandemic. The COVID shutdown damaged our global supply chain, contributing to delays in shipping. These delays eventually decreased our overall supply. 

In addition, the labor shortage happening alongside the massive influx of consumer demand exacerbated the problem. Together this resulted in higher costs of those same goods and services. 

At the same time, the staffing shortages created backlogs of shipping containers on hold in ports expectantly awaiting a workforce to transfer and unload the merchandise.  

Back in May 2021, travel demands surged as a response to the reopening of small businesses. Coming out of a pandemic, many individuals sought Covid-safe travel options outside of airfare and public transportation.

Suddenly demand for rental cars and used cars increased dramatically, causing significant price increases in these industries. During this time, it cost 30% more to buy a used car than it did a year prior. 

Our car industry example is a classic illustration of demand-pull inflation or demand caused by strong consumer desire for a product or service.  

Increased Energy Costs

Another contributor to inflation are the oil companies who lost money during the great lockdown. They are now limiting how much oil they produce, which drives up oil prices or cost per barrel. 

The Washington Post stated that rising energy costs are the main driver of inflation.

Consumers notice these energy price spikes at the gas pump, on utility bills, and at the cash register as shipping rates continue to increase. In essence, anything manufactured or shipped becomes more expensive.

Thankfully, oil refineries on the Gulf Coast have restarted after being shut down in August by Hurricane Ida. This extra supply could ease pressure on gasoline prices.

However, the underlying cost of crude oil will likely remain high, in part because of the continued demand for jet fuel and diesel fuel.

Climate Change

Besides demand-pull inflation, there is a second form of inflation that is currently in effect. Cost-push inflation is when prices increase due to rising costs of production such as buying raw materials and increasing wages. 

Natural disasters can be a cause for cost-push inflation. Our gulf hurricane Ida is an excellent example of this. In the same vein, if a hurricane on the east coast devastates orchards, the supply of apples and peaches will decrease, forcing producers to increase prices to help offset the spike in demand. 

If enough merchants react this way, inflation will ensue. 

Brazil is currently going through a drought, which affects its widely used hydroelectric power. The heightened demand for electricity is causing prices to increase by 11% in some areas. 

We are currently experiencing volatile climate changes all over the world. 

End in Sight

For this inflationary period to end, we need to see both demands wane and the backlog in our supply chains lessening. Eventually, suppliers will adjust, and shortages will dissipate. There is hope on the horizon. 

Companies will begin to manufacture more cars, appliances, and furniture. The central question that continues to plague everyone is how long will it take to catch up?

If the inflation rate gets too high, the Federal Reserve could decide to increase interest rates to slow down the economy. Many of us remember this from the late 1970s and early 1980s. Mortgage rates were advertised at 18% in some areas of the country. This interest boost eventually led to a recession. 

Fortunately, the economy isn’t at that alarming phase yet. Even though prices are currently surging, eventually, this will level out. As long as we have productivity and growth, pricing surges are more than likely temporary. 

Others worry the record deficits to finance emergency coronavirus spending including PPP loans and the continued low-interest loan rates are hurtling us toward even more challenging times. 

At present, we are on alert, but there is no panic. The main concern is how much of the inflation rate will stick around. Consumer goods and services are expected to lower as soon as production increases. However, housing prices and rent increases tend to remain constant. 

There is a point where inflation would become a concern for the United States. Economists and policymakers around the world are vigilant and ready to support a sustained and equitable market recovery. 


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