(This article originally appeared on The Hill)
Yes, there is inflation. Yes, it’s going to last for a while.
Federal Reserve and Treasury officials tell us that the rise in prices we’re seeing will be temporary. Most economists are predicting modest inflation from anywhere between 2 and 5 percent during the coming months. We’ve already seen spikes in both consumer and producer prices. But the markets don’t seem to be panicking — yet. And no one in charge seems to be veering from their course, despite congressional pressures and media attention.
“Demand and supply is driving inflation,” Mark Zandi, the chief economist at research firm Moody’s Analytics told me in a recent podcast interview that covered various areas of the economy and how it affects small business. “Demand is coming up because the economy’s coming back to life. Supply is constrained because of the pandemic. It’s trying to catch up.”
Simple, right?
For most of my small business clients, this isn’t a surprise. You can’t really turn on and off major parts of the world’s biggest economy – and its trading partners – for many months and then expect to just flip a switch and everything just resumes as before. The flow of goods and supplies has been disrupted. It will take a while for things to sort themselves out. In the meantime, as demand and supply fluctuate, so will prices.
“We got a few more months of high prices but by the Fall, the supply side will have caught up to the demand side,” Zandi predicts. Maybe.
But whether or not Zandi’s predictions are right, many of my small business clients aren’t fazed. Why? Because most of them (like what was reported in this recent study from SCORE) are over the age of 55. They’ve been around. They’ve seen a lot. And they’re not panicking. They’re making moves. And the biggest move they’re making is locking in.
They’re talking to their suppliers and fixing longer-term contracts. They’re nailing down employee agreements with their key executives. They’re re-negotiating longer team leases with their landlords, and they’re re-financing working capital and other short-term debts into fixed loans.
They’re doing this with the full knowledge that they will be paying more. They know that for a supplier to agree to a long-term contract, certain purchasing and price commitments must be made. Employees know this too, so additional incentives are considered. Interest rates are also higher when you fix loans for a longer period (although it’s only a matter of time before the Fed increases rates to combat rising inflation).
Smart managers are taking these actions because they know that the best way to hedge against inflation is to minimize risk. By minimizing risk, they can make better long-term decisions. And the best way to minimize risk is to minimize surprises. Longer term arrangements may have a cost. But in inflationary times they have a bigger benefit. They help a manager manage a budget better.
I’ll tell you what my smartest clients aren’t doing. They’re not playing defense and they’re certainly not panicking. They’re staying away from purchases that are out of the ordinary or investing their resources in places – like the stock market – that they can’t control. Instead, they’re reviewing their overhead expenses, cutting where they can and fixing every cost possible.
When you’ve fixed as many costs as possible, you can better plan your expenditures. And once you know what your margins will be, you can do something you haven’t done in a while: raise your own prices. Or better yet, keep your prices as constant as possible while your competitors are forced to raise theirs.
By minimizing surprises, these business owners are able to purchase more inventory and property because that’s another inflation-strategy they’ve learned: grabbing materials and property wherever they can and using whatever financing is available while interest rates are low with the anticipation that they will be able to sell them for even more at a later date. That’s the smart bet in inflationary times.
While Washington and the media wring their hands over inflation, my small business clients aren’t waiting for things to change. They’re adapting to it. Sure, they’re paying more. But the more important thing is, by locking in contracts and fixing their costs, they’re able to know just how much more they’ll be paying in the months to come. And with that information, they’re better able to navigate their companies through these challenges.
“When prices go up, you can make money,” Zandi says, and that’s exactly what’s happening.
