Should small businesses worry about inflation?

The $1.9 trillion relief package and escalating price skirmishes with suppliers have rattled small business owners' nerves, fearing inflation.

The Federal Reserve, which sets U.S. monetary policy, addressed some of those concerns at their March 17 meeting, where central bankers confirmed inflation continues to run below 2%, the benchmark it considers for price stability.

Nevertheless, inflationary concerns, rustled by a jittery market, surging bond yields, an uneven recovery, and the record-cash infusion to fight COVID-19 stimulus, has left many small businesses on edge.

Adjusting to cost pressures

Rising material and shipping costs are a recurring challenge for Corey Tournet, owner of The Laundry Alternative, which imports compact washers and dryers from China and sells them primarily to apartment complexes in the U.S.

Freight costs started escalating late last year, and product costs rose after the Chinese New Year in mid-February. The Leland, N.C.-based company recently paid $8,500 for a container shipment from China that would typically cost between $3,000 and $3,500.

To combat increasing costs, Tournet is renegotiating lower rates with carriers, modifying packaging, focusing on higher-margin products, and developing smaller, portable units, such as Drop!, a countertop washer with a removable spin tub.

"We can fit 830 units per container, whereas, without the removable tub, we could probably only fit 400-plus units," Tournet explains. "So our effective cost savings per unit, which in normal times would only be $3 or so, are close to $10 per unit now."

Hedging against inflation

Bucks County Biscotti Co., a wholesale bakery in Hilltown, Penn., has stemmed price increases on biodegradable packing peanuts and other packaging products through supplier agreements requiring certain volume purchases at certain times.

These pacts were typically struck to adjust for seasonality to ensure an adequate supply of packaging and ingredients during the year's higher volume times, such as the holidays.

"Now, it's being used all year round as a hedge against expected future price increases," says Riley Silbert, a partner at the family-owned bakery established by his parents in 1993 to serve coffee shops, cafes and specialty food markets across the country, but primarily between New York and Washington, D.C.

Startup challenges

Stacy Caprio has been closely monitoring raw material costs for her skincare business since launching AcneScar.org last year. Her primary U.S. supplier last month raised rates 10% on all their products, including specialty ingredients used in her flagship lotions and creams.

She hopes her China suppliers won't follow suit.

"We're already starting to see small effects of inflation, and I'm scared what will happen when it really kicks into effect," says Caprio, owner of the Chicago-based e-commerce business.

While the Federal Reserve provided some guidance on inflation projections and timing, many small businesses lack the resources and capital to take preventative measures or adjust to cost pressures on the fly.

"Large businesses can manage that fluctuation and absorb the changes, but for a small business without extra cash reserves, this can have a big impact," says Davina Kaonohi, owner of Element Apothec, a startup beauty and wellness products maker in Los Angeles. "Inflation causes small businesses to have to make tough decisions whether to pass the increase onto customers or to absorb these costs."

A new threat a year later

Dallas entrepreneur Fatima Subhani invested her personal savings to launch Peace Clothing Co., which targets young adult Muslims with a passion for streetwear.

The retailer, which sells T-shirts, hoodies, and beanies, among other products, opened its doors a year ago amid the first outbreaks of the coronavirus, which triggered nationwide lockdowns, social distancing guidelines, and so many other transformative changes in daily life.

"If inflation occurs, it will hurt many of us when we buy our raw materials wholesale," Subhani says. "Many small businesses don't have investors who can just hand money to them in times of need."