The Cambridge dictionary defines inflation as general and continuous increases in prices. We have been experiencing the prices of products or services rising in our daily lives, for example, when we go grocery shopping or pay utility bills. From the Consumer Price index- August 2022, it can be found that over a year all items index increased by 8.3% in the United States (U.S. Bureau of Labor Statistics, 2022), and it means that our purchasing power is decreasing as such. Investopedia explains inflation rates as the annual percentage change in a general price index. More easily put into words using the example of the Consumer Price Index, one unit of money buys 8.3% fewer goods and services than a year ago. Inflation occurs when a nation’s money supply goes faster than its economic growth, and the money supply consists of all the currency and either available cash or instruments that can be transformed into cash. When Inflation happens, it needs to be controlled and the monetary authority is where, generally known as the central bank, manages the money supply.

What are the causes of inflation? There are 3 factors that lead to an increase in the money supply; when the central bank print and distribute more money, reduce the legal tender currency, and when it loans new money into existence as reserve account credits through the banking system by purchasing government bonds from the bank (Fernando, 2022). According to Fernando, inflation can be classified into 3 types. Firstly, Demand-pull inflation occurs when the customer demand for goods and services rises, whereas the needed supply cannot follow. It can increase jobs, give people more money, and stimulate the economy, but it causes increased prices simultaneously. This theory is often referred to as “too many dollars chasing too few goods” (White, 2022). Secondly, Cost-push inflation is a type of inflation that causes due an increased cost of employment, tax, and raw materials. In comparison with Demand-pull inflation which happens due to a growing need in demands, Cost-push inflation happens when there is an increased cost in the supply chain (White, 2022). Lastly, Built-in inflation happens when people expect that there will be a continuous price rise in goods and services.

It is often said that a little inflation is healthy, and the federal reserve aims for 2% of the inflation rate to boost commerce and prevent deflation because the overall decline in prices can be more harmful than inflation (Floyd, 2022). There are several advantages of inflation. For example, as it is mentioned earlier, optimal inflation can encourage people’s spending to a certain extent. In addition, it can lead to higher resale values of assets, like properties and stock commodities. However, not all aspects of it are beneficial. As the price of the assets rises, the buyer spends more money on products and services. People who are holding cash or bonds would not get the benefits out of inflation as it destroys the real value of holdings. Moreover, businesses, employees, and consumers are all imposed higher prices on the economy, they may experience an additional source of uncertainty in the economy, failing to make the right economic behavior. Moreover, Inflation can subsequently escalate other relative prices as well, like wages, and rates of return along the way. Economists say that the distortions of relative prices can lead to a recession in the economy.

The inflation rate has been soaring lately, and it is concerning small businesses. According to the MetLife and U.S. Chamber of Commerce Q1 2022 Small Business Index survey, nearly 80% of small businesses expressed difficulty in managing growing costs due to inflation. Compared to 2021 when only 16% of them thought inflation was a big concern, the rate has skyrocketed. As a result, they have no choice but to raise the price of their goods or services. Also, they decrease the staff or get a loan from the bank. How can small business owners deal with the current inflation? In the article Impact of Inflation on Small Businesses and How to Manage It, Camberato suggests that businesses need to choose whether they want to stay small or focus on growth. If they choose to stay small, eliminating all unnecessary costs while improving marketing to grow sales would be a solution. But if they want to focus on growth to be able to be ahead of inflation, reanalyzing the price strategy can be a way. To be more specific about reassessing the price, communicating with your team and customers is needed. Notify your team about the price change first and prepare in advance to answer your customers’ concerns or questions about the price rise. Then give your customers notice 2-3 months before the increase date by emailing them, adding a visible banner on your website, or posting it on the company’s social media channel.

As inflation is hitting us, education about economic sustainability is needed more than ever. We all agree that the business must be profitable to be sustainable. The economic pillar is a key factor in terms of corporate sustainability. In fact, economic sustainability is not about profit, but it is more about activities including compliance, proper governance, and risk management. The economic pillar of sustainability is referred to as the governance pillar. Governance means aligning management and the board of directors, shareholder’s interests with the company’s community, value chains, and end-use customers (scoot, 2021). By creating transparent rules and controls, good corporate governance advances the ability to work successfully, essentially lessening the chances of financial loss and risks. It not only enables raising capital but also is fundamental for resilient and long-term success (Chen 2022).

In conclusion, it is clear that inflation is affecting each one of us and businesses. Therefore, it was a great chance for me to learn about inflation, its causes, and its impact on small businesses. Financial sustainability is inseparable to make a healthy business and from this essay, I came to the realization that it is not about stable profit but more about management, compliance, and governance.

• Jason Fernando, 2022 09.13. Inflation: what it is, how it can be controlled, and extreme examples. https://www.investopedia.com/terms/i/inflation.asp
• U.S. Bureau of Labor Statistics. “CONSUMER PRICE INDEX – AUGUST 2022,” Page 1. https://www.bls.gov/news.release/pdf/cpi.pdf
• Jeff White, 2022 08.23. Demand-Pull Inflation: Definition&Causes.https://seekingalpha.com/article/4488432-demand-pull-inflation
• Jeff White, 2022 08.23. Cost-Push Inflation: Definition & Causes. https://seekingalpha.com/article/4488384-cost-push-inflation
• David Floyd, 2022 06.17. 10 common effects of inflation. https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp
• MetLife and U.S. Chamber of Commerce Small Business Index Special Report on Inflation and Supply Chain Shocks on Small Business. 2022.03.03. https://www.uschamber.com/assets/documents/SBI-Q1-2022-Report_3.3.22.pdf
• Joe Camberato. 2022 05.05, The Impact Of Inflation On Small Businesses And How To Manage It. https://www.forbes.com/sites/forbesfinancecouncil/2022/05/25/the-impact-of-inflation-on-small-businesses-and-how-to-manage-it/?sh=3faa29a2ae41
• Feli Oliveros. Is It Time for a Price Increase? Here’s How to Tell Your Clients. https://www.freshbooks.com/blog/price-increase
• Gordon Scott. 2021.06.29. The 3 pillars of corporate sustainability. https://www.investopedia.com/articles/investing/100515/three-pillars-corporate-sustainability.asp
• James Chen. 2022.08.18 What is corporate governance? https://www.investopedia.com/terms/c/corporategovernance.asp
• https://dictionary.cambridge.org/ko/%EC%82%AC%EC%A0%84/%EC%98%81%EC%96%B4/inflation