Although the inflation tax has been reduced from 9% to 6%, this is well above the Federal Reserve-approved inflation tax level of 2%. Inflation is unlikely to return to the 2% target this year, so the actual tax will be above target for at least 2023. Chart 1 shows historical price increases (net of reductions). The percentage of companies raising their selling prices is now reversed from record highs, but still well above the 15% average. The level of these rising prices will likely decline slowly throughout the year as inflationary pressures (consumer spending in particular) ease. While official inflation measures may show great progress due to declines in big items like cars, gas and housing, millions of small businesses will continue to raise prices for some time to come as ‘they strive to scale the bottom line, in the face of less controllable issues. costs such as rent and labor costs.

Reports of price increases in the last months of the year indicate that inflation was high, especially in construction, retail trade, transport and wholesale trade. And 62% of construction companies have raised prices on homes they have yet to sell to consumers. Nearly 60% (58%) of wholesalers have raised prices for goods they have not yet delivered to retailers. Retailers will want to pass these costs on to consumers by raising their prices.

Excluding businesses in agriculture and finance, almost a third (30%) plan to raise prices in early 2023. Wholesale businesses led the “higher price” parade with 48% expecting price increases. Price reduction plans for all companies were rare (2%), although in the fourth quarter of last year 10% said they had actually reduced their prices. Agricultural businesses experience high seasonal demand and production patterns, a reduction in prices is often necessary to unload perishable production. Slowing inflation will not restore lost purchasing power, it will only slow the loss. Price cuts will be necessary to restore purchasing power taxed by inflation.

So does it matter if a small business on the main street raises selling prices? There are approximately six million corporate employers in the United States, and many other one-man businesses (like my plumber and my electrician). Aside from government (eg the military and roads and bridges), about half of what consumers buy (2/3 of GDP) is traded in small businesses, especially services. The percentage of businesses reporting that they have raised prices and plan to raise prices provide accurate forecasts of future inflation. Using 49 years of NFIB quarterly survey reports of price change activity, it is clear that there is a strong link between their actions and inflation.[1] Actions taken by small businesses on Main Street are driving inflation. Dominating the services sector, their pricing decisions will have a major impact on inflation over the course of the year. Wage pressures will dominate pricing decisions and inflation is expected to be sticky.

[1] The quarterly PCE inflation rate is regressed on the percentage of firms increasing their selling prices and the percentage of price increases of 5% or more. R2 =0.65, PCE = -0.455 + 0.108* % INCREASE + 0.069 * % INCREASE >5%. Surveys are conducted in the first month of each quarter, so January survey data is used to predict inflation in the January-March period which is released in April by the BLS. Thus, at the beginning of February, the inflation forecast for the first quarter is known.

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