The news yesterday was that inflation is heating up faster than expected. What adds even more concern is that inflation is now getting much broader than just energy and food.
I know many of you who are a bit younger believe that inflation is manageable -- I get your e-mails and comments that wonder why I am so worried about it. I just raise my prices to reflect my higher costs and everything will be OK. Right?
The problem is that smaller businesses are less able to adjust to inflationary pressures. It is not a smooth and orderly increase in prices for every business in the economy.
If you have big suppliers or customers they can tie your hands. Your costs go up, but you are unable to pass along these costs with higher prices.
An additional worry this time around is that we have a weak economy with inflation -- this is called stagflation. In this scenario, customers begin to sit on their hands. When you raise prices they either buy less from you or even decide not to buy at all. We go out to eat less often and when we do we buy less expensive meals. We travel less and choose cheaper options. We postpone buying new goods. But, we also postpone taking care of old things.
As I have been saying for many months, it is time for entrepreneurs to hunker down. Build up cash, cut overhead, and reduce debt (interest rates will soon spike). Position your business to meet the new economic reality. Focus on value to your customers. While doing all of this, you still need to treat your customers well and keep communicating with them through marketing. Bootstrap your marketing efforts, but stay in front of your customers.
Hi Jeff,
We tried to explain the jump in wholesale prices in our post (http://current.pic.tv/2008/08/20/businesses-pay-more-consumers-might-be-next/), but it seems unclear to me how much this will push inflation on consumers.
Will businesses eat much of the increase and drop profits or raise retail accordingly and risk losing customers in a weak consumer market?
Thanks again for the post.
Cheers,
Colin