Regardless of their industry, business owners need to be aware of what’s happening in the economy. This is because broader economic trends inevitably impact consumers’ decisions. This, in turn, will serve as a headwind or tailwind for your business. Let’s examine three ongoing economic trends that business owners need to know.
Sustained Inflation
The past few years have been a roller coaster in terms of inflation. Remember, inflation is the sustained increase in the price of goods over time. Business owners must be aware of inflation as it could materially impact the cost of their inputs or the demand for certain goods. For example, during periods of high inflation, consumers may shift their spending habits towards more cost-effective products.
Inflation soared following the Covid-19 pandemic and accompanying government stimulus, peaking at 9.1% in June 2022. Since then, inflation has returned to more moderate levels and measured at 3.5% in March 2024 – hovering just over the 3% mark for several months. While this is a significant improvement from earlier years, 3.5% is still well above the Federal Reserve’s target rate of 2%. For business owners, this is a sign that inputs may continue to increase dramatically each month. This could potentially squeeze profit margins and force price hikes.
Sustained inflation could also incentivize the Federal Reserve to leave interest rates elevated, leading to a pricier cost of borrowing. Let’s examine that in more detail.
The Interest Rate Environment
The Federal Reserve recently left the fed funds rate steady at a 23-year high of 5.25%-5.5% for a fifth consecutive meeting in March 2024. After raising rates at the fastest clip in decades, the federal funds rate is now dramatically higher than it was a few years ago. So, what does this mean for business owners?
The federal funds rate has a trickle-down effect that impacts the cost of borrowing for many consumer products. So, expect interest rates to be much higher for products like credit cards or business loans than they were just a year or two ago. If your business relies heavily on financing, elevated interest rates will undoubtedly make it more difficult to do business.
In scenarios like this, it’s usually best to have a Chief Financial Officer who can anticipate broader changes in the economy and position the business for success.
Consumer Spending
These first two trends are not particularly good news for business owners. However, there is a silver lining. Despite sustained inflation and interest rates, consumer spending has remained strong – defying economists and helping to buoy the economy.
This trend has continued over the past few months with no signs of slowing down. Bloomberg reported that the value of retail purchases in March, unadjusted for inflation, increased 0.7% from February. This is a sign that consumers are still spending freely – despite being faced with higher costs for most goods.
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