Since early December 2021 I warned my readers to prepare for a brutal hit to their purchasing power otherwise known as "price inflation". I was confident about my theory that the inflation we were seeing then was not transitory like the Fed and the media talking heads kept saying, but I admit that I'm surprised at the pace with which it's happening. I used to contemplate on relevant subjects to help keep my readers informed but the last few weeks material has been pretty much writing itself!
"Inflation is not a bug but rather a feature of our financial system" - Milton Friedman
Last week US inflation hit a 40-year high of 7.9% (15% if we still used the same method of reporting as we did in 1980). What is different is that interest rates then were WAY higher; the prime rate was 11.5%! Today, you can still borrow money at rates that were in effect when the inflation number was below 2% - not for long though. I expect a quick and painful move upwards on the cost of borrowing which is why I've been recommending taking fixed-rate funding sooner than later if there are needs.
Consumers radically change their spending habits when faced with higher costs; the more sudden they are they more radical the change. Small business owners have had to bear the brunt of all the reckless covid policies and lock downs and now they're being squeezed further by sanctions on Russia which have decimated supply lines and energy costs.
"You've got to eat, you've got to commute; these are not discretionary expenses," Anuj Nayar, LendingClub's financial health officer, said."
I don't think Putin is very nice guy but, the problems we're facing right now aren't his fault, they are self inflicted by our own misguided policies which have been accumulating for a long time. The notion that it's all Putin's fault is BS just like the "inflation is transitory" narrative was along with many, many others, just saying.
Small business owners still have to earn a profit to stay viable and those margins are getting squeezed from both sides; input costs are rising and demand, although still pretty robust in many sectors, is about to take a hit as consumers adjust their spending habits. Pricing power exists so they can raise prices and maintain margins for now but that strategy won't survive a recession.....oops! Did I just say the "R" word?
I believe America is headed for a recession and we're all (I am a business owner too) going to feel it's pain in one way or another.
"New research from Yardeni Research estimates the average household will spend an additional $2,000 per year in gasoline on top of an extra $1,000 in food expenses. Adding this all up, the typical household will spend $3,000 less this year on other things."
"According to American Automobile Association (AAA), 59% of Americans are making lifestyle changes as the national average for regular gasoline at the pump hits a new record high of $4.318. If gas hit $5, three-quarters of the respondents said they would need to make lifestyle changes to offset the spike at the pump."
If you run a business you cannot ignore these facts - you can prepare for them and, God willing, you can even benefit from them.
I recommend using your resources to stock up on extra needed materials and supplies if your business model requires them. Service and web based industries should consider accepting other forms of payment like Bitcoin. If you need to take on debt use fixed rate programs and put the proceeds to work in your business where you have pricing power now.
I am standing by to help with immediate working capital to qualified businesses. My purpose in writing this blog is to share with my readers things that I'm seeing and hearing from a broad section of business owners who talk to me because I'm their lender. They share with me the methods they use to cope as well as their hopes & fears for the future.
I don't have all the answers all the time but, together, we can crowd source information and strategies that will help all of us survive the hard times and thrive in the good ones!