How does inflation affect small businesses?

By: Updated: October 18, 2022

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Rising costs hurt everyone, including small businesses. Your employees may be demanding higher wages and suppliers may be increasing prices every time you place an order. And then there’s the dreaded fuel surcharge when you ship goods to customers.

In this article, we discuss the impact of inflation on small business. We consider what you should do if you need to raise prices for your goods and services.


What is the inflation rate in Canada?

According to Statistics Canada, the inflation rate is currently about 7 percent on an annual basis. This is for the Consumer Price Index, which is a basket of goods and services that people purchase, including housing, food, gasoline and clothing.

When you run a small business, it’s important to understand how inflation is impacting your sector. For example, food prices have been rising at a faster rate than the CPI. Gasoline prices have been up and down like a yoyo since 2020.

Therefore, it’s a good idea to look specifically at your small business and inflation. Analyze whether your costs have risen and see if your competitors are increasing their prices. Are wages soaring as you struggle to keep workers? What’s the price change, if any, on materials that you use to make your products and services?


How does inflation affect small businesses?

As we have mentioned, high inflation rates can leave you with higher costs for wages and raw materials. This puts you in a quandary – should you absorb these expenses or pass them on to your clients through higher prices? This is why inflation is bad for small business.

Here’s the good news: Your customers buy groceries and home renovation supplies just like everyone else. They know that inflation is pervasive and will understand if you need to charge more.

However, it’s a good idea to soften the blow. Consider one or two of these options:

  • Give your customers notice of 60 days. Tell them that you will be raising prices and offer them a chance to stock up at the old price.
  • Implement volume discounts or bundle products together. This will help your key customers who already buy the most from you.
  • Explain that you are raising prices due to inflation rates. Be specific – for example, indicate if your raw material costs have gone up by 20 percent. Some customers will be upset but at least they will understand that you are not just following the crowd and trying to increase your profitability.


What businesses do well during inflation?

Very few. That’s why the Canadian government and the Bank of Canada have been trying to keep a lid on inflation rates, limiting it to about 2 percent. Stable prices benefit both consumers and businesses.

Some businesses like real estate developers can benefit from inflation. For example, you may purchase a tract of land and build new houses on it over the next two years. During that time, housing prices may go up. Of course, real estate prices can also go down – so there are risks in this sector.


When does inflation occur in the normal business cycle?

The business cycle refers to the period of several years when an economy goes from expansion (boom) to recession (bust). Inflation typically occurs during the expansion phase, when everyone is optimistically buying goods and services, resulting in high demand that pushes up prices. During the pandemic, the business cycle did not follow this model. The economy stayed on an even keel thanks to government bailouts but prices for food, lumber and other products soared.


When should I raise prices?

That depends on your business. If you run a seasonal company like summer cottage rentals or landscaping services, you might announce changes in the fall. Offer your customers a chance to “lock in” at the old rate by prepaying for next year. This gives you some cash to tide you over during the winter.

Try to avoid public relations disasters like this: “We want to wish all of our customers a Merry Christmas and a Happy New Year. By the way, we’re raising our prices by 15 percent on Jan. 1.” Separate your holiday greetings from the bad news.


Strategies to deal with inflation

Unfortunately, sometimes there are forces that are beyond your control. Inflation is one of them. So, you need to decide if you will hold the line on your prices and accept reduced profit. Or you can increase your rates to recoup higher costs. No one can be sure whether inflation rates will continue to rage in Canada, but it’s certain that if expenses continue to rise, you will have to boost your prices eventually.

Try to avoid responding to higher costs with “shrinkflation.” This refers to the practice of some companies of keeping their prices the same but including less product. If you have purchased crackers or cookies lately, you will know what this means. It seems that a full box is now considered a couple of handfuls. If you go the shrinkflation route, you may be subject to consumer ridicule on social media. That’s not going to help your reputation or your sales.


How inflation affects our economy

Governments try to keep a lid on inflation because it can cause spiraling prices. Under this scenario, businesses raise their prices to cover soaring costs; then workers demand wage hikes because groceries are more expensive. And then companies try to recoup the cost of paying employees more. And it spirals out of control. This is why inflation is bad for small business.

Just be glad you live in Canada and not Turkey. Inflation there is currently running at an annual rate of a whopping 83 percent.


Inflation and your small business

Inflation is probably already hurting your business, whether it’s through higher costs from suppliers or workers demanding higher pay. You may have to raise your prices to cope – just be sure to come up with a strategy to retain your customers when you do so.


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