The CEO Pulse: Inflation’s implications for small and midsize businesses
Inflation has surged as an unanticipated consequence of the economic shutdown from the pandemic with no predictable end in sight. Pent-up consumer demand, fueled by the government’s infusion of $4+ trillion in economic support, has unleashed a wave of inflation that is challenging for CEOs to plan for and understand. Supply chain challenges, increased wages to compete for talent and price increases from suppliers all contribute to the rising cost of everything.
We learned everything we need to know about inflation in Econ 101. When supply is low and demand is high, prices will rise. We see clear evidence of that. Surging demand for everything — from consumer goods and manufacturing components to construction supplies and workers — is driving increased costs, which translates to higher prices. While some vertical markets take a direct hit from these economic headwinds, we are all affected by higher prices on store shelves.
The complex, interconnected global supply chain proved to be much easier to shut down than to restart. More than twice as many CEOs say supply chain issues are getting worse (46%) than believe it is slowly improving (22%). Shortages of raw materials, computer chips and shipping containers — combined with backlogged ports for unloading and absent truck drivers to deliver the goods — has challenged the global supply chain to catch up.
About 71% of CEOs plan to increase headcount, fueling the talent wars. In a tight labor market, employee retention becomes the foundation for increasing headcount. With labor demand high and supply low, prices must rise.
- 66% of CEOs are increasing wages.
- 26% are offering hiring bonuses. Companies need people to grow.
- 62% believe that their hiring challenges are impacting their ability to operate at full capacity, representing a drag on growth and another headwind.
The result is that 76% of CEOs say they will be increasing their prices in the year ahead. With little choice but to absorb price increases from every direction, CEOs must decide when and how to increase their prices. Just six months ago, in the Q4 2020 Vistage CEO Confidence Index only 43% planned on increasing prices. The rapid jump of 33% demonstrates both the speed of the recovery and urgency of growth. Raising prices, even when everyone else is, remains a fine balance among profitability, market forces, and customer acceptance in place of lower-cost alternatives.
COVID also has played a significant role in both the recovery and inflation.
- The economy surged in the first half of 2021 as vaccines took hold and business investment grew: 63% of CEOs planned on increasing investment in the year ahead according to the Q2 (June 2021) Vistage CEO Confidence Index.
- Then, the Delta variant attacked in July, spiking across the country in Q3. The surge in cases, along with the other headwinds, brought GDP back down with just 2% growth following 6%+ for Q1 and Q2.
- Consumer spending also slowed in the third quarter. Slower growth should slow inflation’s growth. But as the Delta variant recedes, growth and inflation will return.
Economic experts present a variety of perspectives on the course of inflation. Given the unprecedented and unpredictable conditions of the pandemic, economists can have difficulty accurately forecasting. The pre-pandemic days of a slowly expanding economy with low inflation are over.
The intensity and immediacy of the recovery and subsequent economic surge has stressed all systems like never before. But the market always responds. As supply increases to meet demand, prices will begin to normalize if even at a slightly higher level than before. The supply chain will recover, hiring will remain strong, but moderate as growth settles in. Time is the ultimate cure.