"Whenever you have a big increase in the money supply, you can always claim there will be supply shortages and supply chain bottlenecks because there won't be enough supply to meet all the demand the increased money supply creates," says Peter Schiff, Chief Economist and Global Strategist at Euro Pacific Capital.
The only way to balance supply and demand is for prices to go up to the point where supply and demand meet.
As the money supply and cost of living continue to go up, the lower and middle classes are inequitably impacted. This is because, in many cases, they are forced to spend everything they earn on basic necessities.
When the price of food, energy, and housing rise in an inflationary environment like today's, people have to cut back spending elsewhere to make ends meet...unless their wages rise at a higher rate than inflation.
Wages are going up. But are they really?
An estimated 80% of Americans now make over $15 per hour. Amazon recently
In addition to inflation, wages are going up because the government is incentivizing people not to work. This forces business owners to pay employees more money to encourage people to give up the government's incentives. If the government makes people a good deal NOT to work, businesses have to make people an even better deal TO work.
"These pay increases aren't going to be enough to cover what people are about to experience as far as their cost of living. They would be better off if they were still earning less money and their cost of living hadn't gone up as much. They're going to be behind the curve," adds Schiff.
Inflation stifles small business growth
Small business growth depends largely on the amount of discretionary income a business's customers have at their disposal.
When people cut back spending elsewhere to make ends meet, that somewhere is discretionary goods and services. This means people don't eat out at restaurants as often or buy flowers for their paramours spouses.
Businesses that sell discretionary goods or services tend to suffer the most during inflationary periods. People just don't have as much money to spend on luxuries and "the extras".
Inflation stifles society
The higher-order effects of less discretionary spending means less revenue for small businesses, less profit for small business owners, and less money circulating in our economy.
Furthermore, while wealthier people spend a much smaller percentage of their earnings on necessities, inflation can cause them to invest less.
This has negative consequences because investing is what grows our economy. Less investment leads to less innovation and stagnant job creation, which diminishes wealth creation and accelerates economic inequality.
How to hedge against inflation
Another round of stimulus means more "quantitative easing", i.e. inflation.
Inflation is already rattling small businesses and our broader economy.
While large national enterprises might "get away" with raising prices, this option might by a little tricky for small businesses in a hyper-competitive environment.
So what to do?
Keep a close eye on inflation and find creative ways to fight it:
- Have you streamlined your business to cut costs and stay profitable?
- Have you thought about shifting your production, marketing, and sales focus to higher-margin products and services to protect your bottom line?
- Have you taken steps to evaluate and manage your supply chain risks?
If/when you raise prices, be transparent about the price increases and why they are necessary. This helps clients and customers adapt and prepare for higher costs without compromising their loyalty to your business.
Operating a small business is hard. Staying profitable in today's environment is doubly hard.
Stay alert. Stay educated. And most importantly, stay cool.
Have a great week!
Talk soon,
Old Man Winter
