The Effects of Inflation on US Small Businesses in 2021

Since the pandemic began, small-business owners and customers alike have struggled to adjust to the rising costs from inflation and supply chain shortages in the US.

To help you navigate the rest of the year, we’ll go over inflation data for perspective and provide insight from our recent survey results from hundreds of business owners finding ways to overcome economic challenges heading into 2022.

According to the Bureau of Labor Statistics, inflation accelerated starting in March 2021 through September 2021 more than at any point in 2020.1 In fact, inflation in 2021 more than doubled 2020’s highest increases for at least five months straight.

Inflation for 2020-2021

In 2021, inflation rates steadily increased from the beginning of the year. But by April 2021, inflation jumped up from 2.6% to 5.4% month over month.

From the complete Consumer Price Index data set, which ranges from August 2001 to September 2021, we learned the following:

  • In 2021, the US faced the highest month-over-month inflation rates since 2008.2
  • The year 2021 accounts for at least five of the 10 highest month-over-month inflation rates since 1990.
  • Yearly inflation for 2021 may average close to 4%. Even if inflation drops back to 2020 rates for the remainder of the year (which seems unlikely), the yearly average will still end up closer to 3% for 2021.

Without dramatic changes, we may see the highest annual inflation rate in over a decade.3

Most small businesses hit with 20% or more increase in costs

If you’re finding it harder these days to afford your business expenses, you’re not alone. Since the pandemic began, 92% of small-business owners reported that the cost of supplies or services needed to run their business has increased since the pandemic started.4

This year, 71% of small-business owners reported at least a 20% increase in costs for supplies and services:

  • 16% of small-business owners report a 50% increase in costs
  • 13% of small-business owners report a 40% increase in costs
  • 16% of small-business owners report a 30% increase in costs
  • 26% of small-business owners report a 20% increase in costs
  • 19% of small-business owners report a 10% increase in costs

How are small businesses managing expenses with higher inflation, coupled with ongoing pandemic concerns and supply chain shortages?

To counter inflation, 89% of small-business owners have increased their prices

As a result, 82% of small-business owners have had to increase the price of their products or services due to inflation since the pandemic began.

Almost half of businesses (45%) have raised their prices by more than 20%, while 44% report raising prices no more than 15%. Only 11% of small-business owners report no increase in their prices.

Across the board, small-business owners are feeling the financial weight of increasing inflation:

  • 60% are concerned about the financial health of their business because of inflation
  • 47% report their profit margin decreasing due to inflation since the beginning of the pandemic.
  • 37% of small-business owners are afraid inflation will hurt the health of their business. 
  • 37% report customers have complained about inflated prices at their business.
  • 30% think raising their prices will deter customers from shopping at their store.

With about a third or more of small-business owners worried about the customer impact of raising prices, many businesses are turning to other ways to adjust for inflation, shortages, and ongoing economic troubles brought about by the pandemic.

Nearly half of small businesses are reducing inventory

Inflation increases may be beyond your control, but adjusting your business’s overhead expenses can help ease the burden and get you through to 2022.

According to our survey, almost half of small-business owners have turned towards tracking expenses and reducing costs on inventory, employees, and marketing:

  • 46% are reducing the size of their inventory.
  • 44% are purchasing software to help track their businesses expenses.
  • 24% have hired an accountant to find solutions to save money.
  • 40% have reduced marketing costs.
  • 29% have moved to a cheaper workspace.
  • Only 17% of small-business owners report not changing anything to reduce costs. 
While some small-business owners are reducing employees, others struggle to find more.

 According to our survey, as many as 42% of small-business owners have reduced the number of employees on their team. However, 45% of small-business owners report struggling to find employees.

Tracking business expenses, moving to a cheaper workspace, or switching to a cost-effective credit card processor (like Stax) can help reduce your bottom line. But supply chain issues can affect your inventory and customer service abilities even if your budget is on track.

Small businesses struggle with the supply chain shortages

Due to supply chain shortages since the pandemic began, most business owners reported the inability to acquire products, perform services, and meet customer demand. About a third or more of small-business owners have had to make inventory adjustments by changing or dropping some products entirely.

According to our survey, here’s how supply chain shortages are affecting small-business owners:

  • 64% report an inability to acquire products or perform services.
  • 56% report an inability to meet customer demand.
  • 43% report being forced to change the products the business keeps in inventory.
  • 40% report an inability to repair or maintain property or equipment.
  • 31% report having to stop selling certain products altogether.
Supply chain shortage stats

Small businesses hope to bounce back after Q4 2021

Although faced with challenges from inflation, supply chain shortages, and an ongoing pandemic, small-businesses owners can still see a bright side to the shifts:

  • 85% report they feel a stronger sense of support to shop locally since the pandemic’s beginning. 
  • 71% report an increase in customer spending over the last six months. 
  • 72% expect a significant increase in shopping this holiday season compared to last year. 
  • 75% of small-business owners say they’re counting on higher sales in Q4 to make up for other losses throughout the year.

The rest of the year remains financially uncertain for many small-business owners. Still, with awareness and some accounting adjustments, it may be possible to overcome some of the obstacles the pandemic presents.

Methodology

We used the Consumer Price Index, the most widely used measure of inflation, to find the yearly and monthly inflation rates (the percentage rate of change in price level over time). The data represents US city averages from 2020 to 2021 month over month. Additional Consumer Price Index data spans monthly and yearly rates from August 1990 through September 2021.

We partnered with Pollfish to conduct an anonymous survey of 700 small-business owners. Business.org analyzed the results and compiled this report. To learn more about Pollfish and how it organically finds respondents, check out its methodology.

Sources

  1. Bureau of Labor Statistics, “12-Month Percentage Change, Consumer Price Index, Selected Categories.” Accessed October 19, 2021.
  2. Bureau of Labor Statistics, “Consumer Price Index.” Accessed October 19, 2021.
  3. Statista, “United States: Inflation rate from 1990 to 2020.” August 9, 2021.
  4. Business.org proprietary survey conducted via Pollfish October 2021.
Trevor Wheelwright
Written by
Trevor Wheelwright
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