If you were taking an economics class and had a test question asking, “What happens when a business’s cost of goods goes up?” The correct answer on a test written by a professor would be that the cost gets passed to the customer. In theory, that is correct, but any small business owner will tell a very different story.
Inflation comes in waves, with a lag effect. Every node in a supply chain hesitates to pass costs to customers. Generally, every increase in costs means a loss of margin immediately with the hopes of recovery in the future. Businesses have competitors, and customers have a choice over which supplier to buy from. When your cost of goods goes up across the industry, the first among you and your competitors to raise prices will likely permanently lose customers and might go out of business. In other words, at former pricing, there was room for more competitors; as prices go up, less margin available means fewer business models will survive due to lower margins.
Let’s say you have a product you buy at wholesale for $100 a unit and sell for $200. This means you are doing keystone pricing, charging double your cost, and maintaining a 50% margin. The margin gives you the room you need to manage operating expenses. You can’t simply raise your price to customers to $220 if your cost goes up to $110. Customers won’t just pay more than they were paying. They will shop you against your competitors when you suddenly increase prices. The truth is that when costs go up, retailers generally eat the cost for as long as they can to avoid passing costs on to customers. With the passage of enough time, inflation hits customers in all areas of their finances, and they expect to pay a little more, but they will only pay you more once your competitors start raising their prices. Until that inflation lag works through all industries, the customers will shop among your competitors before spending more with you. If your customers start leaving, you may never get them back. When customers go for a competitor, your overhead remains the same, but income decreases. Lower income means the ratio of overhead to income increases, and margins fall. Too much of this will put you out of business.
With every ripple of inflation through an industry, people at every node in the supply chain are hesitant to raise costs to customers and will absorb those costs as long as they can. Eventually, one company (the one with the lowest margins and savings) cannot afford to eat the cost and must start raising its prices. The company forced to raise prices first will lose many customers to competitors who could afford to hold out longer. It’s like a breath-holding contest among competitors; the first who needs to breathe gets eliminated. Like the child game “musical chairs,” every round, somebody is eliminated. Industries take decades to develop, and most industries have many players that have grown to mature companies. These companies can be bankrupted quickly by rapid inflation. When you see inflation waves knocking out competitors in a mature industry, you must take notice; this is what a dying industry looks like. When you see it across all industries, that is a dying economy. Those in the government creating the inflation must be removed immediately and permanently.
The role of government is to secure our rights and promote the general welfare. This means protecting the environment that aids in the pursuit of happiness. An enormous portion of taxes comes from small business owners. Taxpayers have a right to have their tax dollars work for them. When politicians and bureaucrats engage in actions that harm business owners, their tax dollars pay for the destruction of their businesses.
Any deliberate action that harms people’s businesses is an absolute breach of the public trust. Inflation destroys businesses that took decades to build. Inflation should be avoided like the plague, and politicians knowingly engaging in actions leading to inflation should be dishonorably discharged from the government.