Everyone is feeling the crunch in 2022, especially those who run businesses. Inflation is at a record high, employees are demanding better wages and better work environments, and the ability to get the products needed to do business has continued to be a major challenge. The predictions that the COVID-19 pandemic’s effects would begin wearing off as more and more people got vaccinated have been heavily debunked, and with the war in Ukraine and other world events continuing to disrupt supply chains and increase the costs of items like gas, many companies that have historically relied on imported goods or cheaper shipping costs are finding it hard to exist in the market. The metropolitan New York City area has felt this particularly hard, with rent prices returning to pre-pandemic levels this year.
Everything Is More Expensive Now
While originally thought to be “transitory,” inflation has taken off in 2022. The May Consumer Price Index (CPI), released in early June 2022, was up 8.6% year over year, a .3% increase from April 2022 and the highest level since 1981. The core index, which excludes food and energy, increased 6% year over year in May 2022. In short, everything is more expensive now.
Many products became cheaper during the 2020 COVID-19 pandemic. As companies struggled to stay in business, various deals were offered, and as gas prices and insurance rates decreased, companies were able to offer products at a better deal. Now with gas prices soaring partially due to a ‘return to normalcy’ and partially due to the Russia-Ukraine war, companies are having to raise their prices. Furthermore, since many businesses did not survive the pandemic, there is a decrease in competition on the market, allowing sellers to sell their products for more.
On the bright side, the metropolitan area has experienced significantly less inflation than the rest of the country. While the national average rate of inflation has been about 7.9%, the NYC metro area has only experienced a 5.1% increase. Still, that increase is severe, and the increase in gas prices and rent can still be felt not only by consumers but by business owners as well. Furthermore, even with a slightly better inflation rate than other states, the rising costs of everything have led to other issues in the modern workplace. What’s more, the prime lending rate is up 1.25% since the beginning of the year, and it is anticipated that there will be 4 to 5 more increases by year end.
New Hires Have More Demands
The desperation that the lockdowns created has caused many in the workforce to seek out non-traditional employment, and with the rise of the gig economy (Fiverr, Amazon Flex, etc.), it has become increasingly difficult to lure in potential new employees with the same promises of the pre-COVID era. Despite overall unemployment of 7.6% in New York City, people are not returning to the jobs they had prior to the pandemic.
Some of this has to do with perceived risks. The main businesses of the NYC area are traditionally office environments and in person event driven (e.g. entertainment, dining) work, both of which saw massive layoffs during the pandemic. Many workers in both finance and tourism are afraid to return to these industries, having seen how quickly their job can be pulled away from them.
The rising cost of everything has also made workers afraid to return to in-office work. Many potential employees have become accustomed to working from home. This has also caused employees to realize that they save significant money on food, gas/commuting, day care, and more, which has kept them from returning to their office environments.
This has caused an imbalance of power, where employees are able to demand more, thus increasing overall business costs when hiring. Businesses are having to not only pay better wages to match inflation, but they are also having to offer things like gas reimbursement or free lunches in order to entice new hires to keep their offices and businesses running.
A March 2022 Report states that compensation costs for non-government workers increased 1.4%, seasonally adjusted, for the 3-month period ending in March 2022, and that wages and salaries increased 1.2% and benefit costs increased 1.8% from December 2021. (US Bureau of Labor Statistics).
The Supply Chain Has Still Not Recovered
During the last two years, international supply chains have been pushed to the limit, revealing many shortcomings in this highly complex system that affects just about everything – from toilet paper to state-of-the-art computer chips. The result was disruptions that affected nearly every country on earth, including the US.
Most analysts believe that the supply chain concerns will not see any improvement in 2022. Some project a degree of catching up in 2023, but as more people continue to not use traditional brick and mortar stores and continue to rely on shipping, the delivery mechanisms are still thoroughly gummed up.
More trucks are needed, but truck production is still being delayed by shutdowns earlier this year in countries like Malaysia and Japan. This makes doing business in the NYC metropolitan area particularly challenging, as most businesses rely on imports from the mainland. Thus, companies are selling out of products long before the demand has come close to being met. Millions of potential dollars are lost on simply not being able to get products out.
There is some hope on the horizon. Shipping companies do expect improvements to the shipping delays, and there is talk of Russia and Ukraine coming to the table for peace talks, which would help with the price of gas. The Biden administration has talked of implementing plans to curb inflation as well, so time will tell if these particularly rough times come to an end soon.
The keys for business are:
- Ensure that you have access to adequate cash reserves to ride out slow-downs and delays. This could either be cash balances or access to lines of credit. Remember, with rising interest rates, debt is going to become much more expensive.
- Set up contingency budgets so that decisions are in place if your company fails to meet revenue targets. You need to be able to act quickly and decisively if revenue levels do not materialize.
- If you can’t find the staff you need, consider outsourcing certain back-office and other functions utilizing outsourced labor or the gig economy.
- Look for other avenues to source product … including more local sources. With the increase in fuel costs, importing goods is going to continue to be more expensive.
- Look for ways to lean more on technology to replace some of the manual, labor intensive functions. This may require a little up-front investment, but it will help alleviate some of the pressure to find and train staff.
Times are anticipated to get tougher over the next 6 to 12 months, and there is even talk that we may drop into a recession or depression. It is uncertain whether or not this will be the case, but the more strategic you can be in your thinking, the better you will be prepared.
Carissa Scanlon, CPA
Carissa joined Cerini & Associates in March, 2007, and has since provided both tax and audit services to various business industries. Carissa’s audit background with small to mid-size organizations gives her invaluable insight to the internal workings of a business that will allow her to fully assist to all of a company’s needs and growth.