High Inflation Making Business Risky

Smart Money

AS THE GOVERNMENT considers another series of stimulus initiatives, the threat of inflation looms larger for small-business owners.

The August reading of the Consumer Price Index stood down 1.5% below that of the year-ago period, but analysts and economists say they are concerned that new spending, combined with a raft of earlier initiatives, will soon trigger higher prices for goods and services.

… Leaning on a credit line to purchase inventory or pay employees during a slow sales period may seem like an effective solution, but a spike in inflation could also cause a business’s cost of capital to surge, says Joseph H. Astrachan, the executive director of the Cox Family Enterprise Center at Kennesaw State University in Kennesaw, Ga. If inflation rises high enough, the Federal Reserve may attempt to moderate prices by raising interest rates, he says. So even if owners have a revolving line of credit that wasn’t eliminated or slashed dramatically in the credit crisis, their cost of capital would jump, Astrachan says.

Then, of course, employees will want more money to keep up with higher prices. Although employers have a little more power to withhold raises now because the job market is so poor, to keep quality staff members around, you continually have to pay them more, says Astrachan. However, “when someone says ‘I want a raise’ and then the boss says ‘by the way, I can replace you,’ inflation gets nasty,” he says.