How Has U.S. Inflation Affected Small Businesses from 2021 to 2024?

2024-01-29

It’s no secret that inflation has been hitting the U.S. economy hard. Businesses and consumers alike have often found themselves a bit shellshocked at rising costs, product shortages, and the increasing number of small businesses that are shuttering their operations because they simply can’t keep up. A simple Internet search will show you articles dating all the way back to 2021 that discuss the rising effects of inflation on the U.S. small business economy. 

The numbers don’t lie. According to one study:

  • In 2022, 88% of small business owners reported inflation was impacting their business. 
  • Most small businesses have seen costs increase by 20% or more. 
  • As a counter to inflation, as many as 89% of small businesses increased prices. 

Inflation impacts every industry 

Inflation is everywhere. It’s not just one type of business or another. Supply chain and labor issues, rising gas costs, and so forth, affect small businesses (and large companies) in all industries. And it’s not just economic factors. Viruses also play a role, and we’re not talking about Covid.

Remember the 2023 egg fiasco when the cost of a dozen eggs skyrocketed by 400% or more? At the time, it would cost you between $4.25 and $7 for 12 eggs depending on your location (in 2021, it was around $1.79). Today, it’s back down to $1.60 depending on where you live. That massive spike was due to a combination of inflation and the effects of the H5N1 bird flu, which decimated chickens across the United States.

2024 shows some hope 

As we enter 2024, it’s easy to be worried. However, things might just be looking up. There’s a lot to be hopeful about. Does that mean inflation will go away? No, prices rise every year, even when we’re not laser-focused on them.

The good news is that most experts predict that inflation will hit 2.5% or even lower, approaching the Fed’s targeted rate of 2% annual growth (the rate of inflation deemed acceptable in any year). December 2023 marked another in a series of monthly inflation declines, with an adjusted rate of 3.1%. To compare, June 2022 saw an inflation rate of 9.1%.

What does this actually mean? Simply put, inflation continues, but the rate increase has slowed. In turn, that means the costs businesses must pay for necessities, like raw materials and fuel, are also beginning to decrease.

Forbes points out that 2024 is expected to see even lower inflation rates. That’s backed up by other sources, including US News and World Report and Bloomberg. Small businesses will continue feeling a financial pinch, but the pain should be rapidly easing.

The IRS introduces important tax savings for small businesses

Inflation has made things hard on small businesses and the federal government has definitely noticed. The IRS has introduced important tax benefits for small businesses affected by it. The Inflation Reduction Act, combined with other tax system changes, means that small businesses may qualify to write off up to $1,220,000 in qualified asset additions in year one. Depending on your tax strategy, you may also benefit from changes to the standard deduction, foreign-earned income exclusions, gift exclusions, and health flexible spending plan limitation changes. Make sure to visit IRS.gov to view all the tax inflation adjustments for 2024.

How can small businesses roll with the inflationary punches?

While inflation is definitely easing as we move into 2024, that doesn’t mean everything is golden for America’s small businesses. Belts remain tightened, credit is still scarce, real estate costs are still exorbitant, and consumer confidence is still a little low. Much of that is due to the lag effect in the economy. When inflation eases, it takes time for those changes to move into the supply chain. Thankfully, small businesses can do several things to roll with the punches.

Focus on retaining your current employees

The US has the lowest unemployment rate in over five decades. Coupled with the lingering effects of inflation, it means that business owners need to focus on retaining their employees, particularly small business owners.

It costs between one and two times an employee’s annual salary to replace someone, and that doesn’t include the annual pay the new employee will earn. Businesses must account for costs like job ad creation and placement, interviewing, onboarding, and lost productivity as the new employee gets up to speed. That’s on top of any costs incurred by trying to cover the departing employee’s responsibilities until you can hire a replacement.

Identify cost savings and pass those along

As inflation begins to ease, it’s natural that some businesses will want to keep their prices high to recoup some of their financial losses. Don’t do that. Your customers are paying attention. They know that inflation is easing, and they’ll jump ship to a competitor if they feel that you’re maintaining artificially high prices. Identify areas where your costs have decreased and then pass those savings along to your customers. They’ll reward you with increased business and improved word of mouth.

Outsource calls, scheduling, and more to the team at Smith.ai 

Outsourcing key business processes can also help you save capital. Our team of dedicated virtual receptionists can act as your 24/7 answering service so that you never miss a single lead. Plus, we can offer support for things like lead intake, appointment scheduling, and even help with your outreach campaigns to generate those leads in the first place. To learn more, schedule a consultation or reach out to hello@smith.ai. 

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Tags:
Business Education
Small Business
Written by Samir Sampat
Samir Sampat is a Marketing and Events Associate with Smith.ai. He has experience working with businesses of all sizes focusing on marketing, communications, and business development.

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