Preparing for Inflation

I continue to be in the camp that is worried about inflation -- even possibly hyper-inflation -- in the not too distant future.  Our ballooning debt along with the many latent inflationary pressures could soon create the spark that ignites a fire storm of runaway prices.  If we see a currency crash, or many are now saying when we see one, we could likely see double or even triple digit inflation.

The problem for small business during inflationary times is that they are less able to adjust prices as quickly to adjust to inflationary pressures.  There is never a smooth and orderly increase in prices for every business in the economy and small businesses often suffer the most.

If you have big suppliers and/or customers they can tie your hands.  Your costs go up, but you are unable to pass along these costs with higher prices.  One of the added costs we now have to worry about is increased taxes.  This is a real cost to entrepreneurs and cannot be ignored as a part of inflationary costs.

What I worry about even more is that we may see inflation take hold long before the recession is over.  This makes keeping prices up to stay ahead of increasing costs even more difficult as demand will still be fairly weak for some time.  Given the growing evidence that this may become a long, very long, recession this is a real threat. 

So what can a small business do in terms of pricing strategies to try and weather this impending inflationary storm? 

The recession has made entrepreneurs leery of doing anything but cut prices to keep their businesses afloat during the recession.  While that may still be the best course over the short-run, pay very close attention to pricing from your suppliers, decreases in unemployment, increasing interest rates, and pricing moves from the big boys in your industry.  These are the elements of your inflationary dashboard.

When inflation heats up even a little, be aggressive with frequent small price increases rather than waiting and trying to catch up at some point with one big jump. Don't let yourself get behind, as small businesses can almost never play catch-up with their prices.

This can be tough to implement for some businesses, particularly if you publicly list your prices.  For example, it can get very costly to print up new menus each month for a restaurant owner who wants to follow this strategy.

But customers are less likely to pay attention to price increases if they are small, so it is essential to find creative ways to communicate your pricing to allow for you to implement this strategy during inflationary times.  For a restaurant it may require using menu inserts that can inexpensively be replaced.  This was actually very commonly used in restaurants during the 1970s and 1980s when we had high inflation.

I know the question of the week is pricing, but I can't let this discussion go without a brief reminder that the income statement is also made up of costs.  Adjusting to inflation also requires careful attention to expenses, as cutting costs can at least somewhat help ease the pressure to increase prices. 

Continue the prudent management of expenses that helped you survive the recession:

- Keep overhead low.

- Build cash reserves to buffer short term price increases that precede your ability to get higher prices from your customers.  I know this sounds contrary to the investment advice we are now hearing about holding cash during inflation.  Don't think of this cash as investment -- it is your levy to hold back the rising tide of inflation. 

- Watch your margins carefully. Worry about growing profits, not sales.

- Don't lock into long-term contracts that have narrow margins with large customers.

- Pay down variable interest loans ASAP, especially now that interest rates are temporarily relatively low. As soon as inflation heats up, interest rates will continue to rise.  And given the stubbornness that the Fed is now showing with interest rates, we may soon see huge spikes in rates over just a few quarters as inflation takes hold.