Inflationary Forces On Main Street

Roughly six million small employer businesses populate “Main Street” in every town and city across America. NFIB takes a random sample of its membership (about 300,000 firms) every month and asks the same questions, including “How are your average selling prices now compared to 3 months ago?” Based on the August survey, about half of small businesses raised their average selling prices since June. The percent reporting higher average selling prices has risen steadily since April 2020. For historical context, since 1986 the monthly average reporting raising prices is a net 8 percent.

Inflation is defined as an increase in the average price level at which goods and services are sold. Clearly this is happening as the percent of suppliers of goods and services report raising their average selling prices. The size of the increase also shapes the nature of the inflation and the speed at which average prices rise. The percent of owners reporting price hikes of 10% or more has risen from 1% in May 2020 to 14% in August (as well as in prior months). So, more firms are raising prices and more are raising prices at higher percentages. This is a recipe for a continued rise in inflation.

Price increases are not uniform across industries. An optimist at the Fed might look at the data below as evidence that inflation pressures are easing as the incidence of price hikes fell in important industries such as wholesale, retail, manufacturing and services. But, overall, the frequency of price hikes did not change and did rise in construction, a key industry.

Raised Selling Prices (% raised prices):

                                         June   July  August

Wholesale                            82%   73%   68%

Construction                        69%   65%   67%

Retail                                     63%   57%   52%

Manufacturing                     62%   61%   60% 

Agriculture                           46%   37%   51%

Finance, Ins., Real Estate 33%   32%   29%

Non-prof. Services              36%   43%    38%

Transportation, Comm.      27%   33%   52%

Professional                        23%   24%   26%

All firms                               54%   52%   52%

Inflation will end when firms stop raising selling prices (or begin cutting prices). Currently, the percent of owners planning to raise prices is at the highest level reached since March 2020 (chart). For the last four months, a recent record high 44% reported planning to raise average selling prices in the coming months, reflecting a “mindset” that is definitely “inflationary.” 

Apparently, owners expect cost-side reasons to raise prices as well as opportunities to raise prices in the future. Expectations are for “inflation” in the near term. For the time being, inflation expectations are not anchored on Main Street.

For most small businesses, labor costs are one of the largest costs they need to cover. Raising compensation is the main tool owners have to attract and keep the labor force they need. In most periods, the percent of owners raising compensation exceeds the percent raising average selling prices (passing costs on to customers). July 2008 is an interesting exception: oil was $140/bbl and energy costs were high and being passed on to customers via higher prices. Then the recession hit and price cutting dominated markets. But in recent months, the incidence of price hikes exceeded the percent reporting higher compensation, so those costs are being passed on to consumers. 

Historically, this is considered a major source of inflation, a “wage-price spiral.” Just how much our current experience mirrors the past will depend on the path of current compensation trends and price hikes.

To tie these numbers to the larger stage, a regression of inflation measured with the personal consumption expenditures (PCE) on NFIB measures confirms that we don’t get inflation unless we have inflation on Main Street. Using NFIB data collected in the first month of each quarter, PCE inflation for the entire quarter is well anticipated.