How Inflation is Affecting Small Businesses Worldwide

It has not been an easy couple of years for small business owners. Pandemic shutdowns caused many to go under, despite help from government grants and loans. Now, those that survived are facing another existential threat – rapidly increasing costs as inflation rises beyond its usual rate.

Economies around the world are experiencing rates of inflation not seen for two or three decades. In the US it has hit 8.6%, and in the UK it is expected to rise to 10% later in the year. Neither country has experienced numbers like this since the 1980s. Unsurprisingly, many small business owners are worried about the effect these rises will have on their operations.

What is inflation, and why is it rising?

Steady inflation is a normal part of the global economy, and most countries aim for around 2% annually. Goods and services gradually increase in price over time, and the same amount of money today will buy much less than it did ten years ago. Wages also increase to match the rate of inflation, at least in theory, thus keeping consumer spending power level.

When inflation is too low it means a sluggish economy. However, when it suddenly increases, the effects can be drastic for business owners and consumers alike. The current levels of inflation are due to many events, starting with the post-COVID re-openings. During the shutdowns, inflation fell to below the 2% benchmark. When restrictions were lifted, inflation rose again as consumers started to increase their spending. Government support packages, which were necessary to keep many small businesses afloat, are also partially responsible.

The conflict with Ukraine has also had an immediate effect on energy costs as many countries are cut off from their main source of oil and gas. COVID restrictions in China are also causing supply-chain issues. The UK, in the aftermath of Brexit, has to contend with pressures on the supply chain. As demand outstrips supply, prices are driven up and inflation increases.

What does this mean for small businesses?

The first and most obvious effect of inflation is that it drives up running costs. A recent survey found that almost all small business owners had experienced a hike in the cost of their services and supplies. Almost two thirds of respondents reported increases of more than 20%.

During the pandemic, there was also a shift in the labour market, with many low paid workers seeking more rewarding employment. Many small businesses have had to increase wages to keep staff on board. While this may not be a bad thing, it adds to the overheads.

As the cost of supplies and staffing increases, many business owners have no choice but to pass some of it on to their customers. Figures on this vary, with some surveys suggesting that upwards of 80% of small businesses have had to raise their prices. With price hikes comes the risk that customers will no longer buy, especially as inflation also hits the pockets of the average consumer.

If businesses want to avoid raising their prices for customers, they must look elsewhere to cut costs. This often means reducing overheads in various ways, such as having a smaller inventory or cutting the marketing budget. Many must accept that their profit margins will decrease. There are also a growing number of small businesses that are taking on debt to stay afloat.

Business leaders are advised to review their budgets and business plans in order to get through the next months and years. If there is not already a crisis management plan in place, now is the time to make one.

Could new online casinos be inflation-proof?

Looking at the wider picture, many categories of small business have struggled in a hostile economy since the 2008 financial crisis. But there is one sector that has seen consistent growth in the years since, and that is the online gambling industry. Many of the new casino sites that have opened in the past fifteen years started out as small operations with just a few employees.

The pandemic has damaged the bottom line for land-based casinos, and even now, many report that sales have not returned to pre-COVID levels. These shutdowns, however, had the opposite effect in the online space, and new casinos grew as more as people started playing games at home.

Gambling is an activity that usually remains resilient during times of economic stress. The revenue figures for global gambling bear this out, but a recent government survey in the UK suggests that some gamblers may reduce their casino spending in response to the cost-of-living crisis. Entrepreneurs looking to open new online casinos should not be put off by this, however. Reductions in spending are likely to be temporary, and it is a certainty that gambling will continue to be a popular activity in the future.

When will the current inflation end?

While politicians have been assuring us that the current inflation is transitory, economists have a more realistic prognosis. The issues surrounding the supply chain, and current geopolitical events, are not going away quickly. We can expect inflation to remain high for at least the rest of 2022, after which it is hoped that it will drop sharply and even be under the target rate for a few years.

Such a downturn could signal a recession, although it is unlikely to be as severe as the one after 2008. In both the UK and the US, unemployment currently stands at a fifty-year low, suggesting a resilience that was absent the last time.

What does this mean for the future?

The knock-on effects of soaring inflation will continue long after levels return to normal. Events like these go on to cause permanent shifts in the economy. Certain categories of business may disappear altogether, while others proliferate in the gaps that are left.

Many business owners may be forced to diversify, or even completely change what they are doing. Those who had planned on growth may have to focus simply on staying afloat until things improve. Working practices are also changing. During the pandemic many were forced to work from home, but as restrictions started easing a lot of workers had resumed their daily commute. Now, as fuel becomes unaffordable for some, more people are choosing to go back to remote work.

There’s no denying that the current situation is grim for small businesses, and it is inevitable that some will be unable to survive the squeeze, even if they made it through the pandemic. However, the world looks very different today than it did just a few years ago, and some SME owners can use that to their advantage.

The world is connected like never before, which opens new possibilities for resources. Marketing streams, suppliers, even workers – all these are more accessible today through our global communication network than they were in the past. Leveraging these resources could be part of the solution for some enterprises.