Inflation, Energy & Other Trends Impacting Business Owners

Inflation tops the list of economic factors impacting the United States, and many foreign markets. Driven primarily by energy prices, we’re seeing the highest level of consumer price increases since 1981.

COVID-related impacts included shutdowns and supply chain disruptions that led to cost-push inflation, as costs of materials and other inputs increased. The Federal Reserve's low interest rates and bond purchases, as well as extraordinary measures such as the Main Street Lending Program , were coupled with direct-to-consumer relief payments. This expansion of the money supply is a second force, which has created demand-pull inflation. The delayed response from the Fed, with claims of “transitory increases,” created a delay in bringing price levels under control.

This more general effect was exacerbated by the conflict in the Ukraine, and related disruptions to the supply of oil and liquified natural gas (LNG) on the global market. ?

These issues, and an array of additional trends, are impacting the economy, the capital markets, and are creating a challenging operating environment for small business owners. Please find below the list of primary trends, which we’re using to guide our organization and our advice for clients:

Economic Disruptions & Recessionary Risk

• Inflation in the United States hit 9.1%, the highest level since 1981 (Department of Labor ) when measuring the Consumer Price Index (CPI), and reached 9.1% in the UK, 8.6% in the Eurozone;
• Energy disruptions are an increasing risk – Russia’s invasion of Ukraine means supply disruptions for oil and liquified natural gas (Bloomberg) , as energy companies are bracing for additional disruptions in the availability of parts and equipment (Reuters );
• “49 million people face famine as Ukraine War, climate disasters? intensify” (Washington Post )
• Unemployment remained at 3.6%, with both steady wage growth and moderate hiring (Yahoo Finance ); and
• Federal Reserve Open Market Committee voted to raise Fed Funds rate by 0.75% (CNBC ) –tightening the flow of credit, curbing price inflation, and raising the risk of recession.

Trends in the Capital Markets

• With these changes in monetary policy, bond yields have been increasing (prices move inversely), with the 10 year rates hitting 3.49% in June (the highest level since 2011) and recessionary concerns reflecting yield curve inversion. (CNBC );
• The dollar has been strengthening with the DXY (a measure of the U.S. Dollar relative to six foreign currencies) hitting 104.7, a 20 year high (CNBC );
• U.S. multinationals must record foreign sales at lower levels (Barrons ), demand for U.S. goods is weakened by higher prices in foreign currencies, and foreign governments are experiencing an increase in the cost of servicing dollar-denominated debt;
• Public equities are still largely overvalued on a Price/Earnings basis – Despite the 24% decline in the S&P, the CAPE Shiller (at 28) indicates an “89% chance that CAPE will be lower in the future, and only 11% chance it will be higher” (Seeking Alpha );

• The S&P 500 energy sub-index, outperformed the market over the first-half, increasing 29% while the wider market recorded its worst half in more than 50 years” (Financial Times );
• The trend largely mirrored broader measures of commodity prices, with the Bloomberg Commodity Spot Index (which tracks prices for 23 raw materials) rising to record highs (Bloomberg );
• “Commodities are not only buoyant but they are totally strategic, at this moment, when countries and companies are reshuffling their supply chains” (Bloomberg ); and
• We’re bullish in the long-run on both precious metals and foodstuffs, based on concerns of further geopolitical and market-driven supply constraints.??

Impacts on Business Owners

All of this adds up to a difficult environment for business owners - securing inputs, the rising costs of those inputs, finding and retaining employees, a more difficult environment for raising equity capital, and the increased costs of borrowing. Here's how it's all affecting us entrepreneurs:

• It's getting more difficult to find early stage investors - Venture Capital is becoming more difficult to raise (Economist );
• Energy price increases act as a tax on businesses (US Chamber ), and are a significant part of the overall increases in the cots of most inputs;
• Increasing interest rates are disproportionately disaffecting capital intensive firms with large debt service, and more generally increasing the costs to borrow (i.e. asset-based finance, unsecured lines of credit, trade finance);
• Low unemployment has been driven by consistent job creation and retirement patterns, but it has created difficulty when firms are hiring (WSJ );
• Persistent inflation has created the need to re-examine prices to maintain margins, as well as the need to review employee compensation levels to avoid attrition; and
• We're hitting an inflection point in the flow of Private Equity, as PE firms are finding it harder to raise fresh funds, “easy money is drying up” (Private Equity News ), and more firms are facing “down rounds” (i.e. firm valuations decreasing in subsequent rounds raising capital) (Financial Times ).?

Updates Around RVA Works

• Main Street America! I was recently pleased to present, "Entrepreneurship in the Post-pandemic Environment" at the national conference, highlighting the systemic changes to physical versus digital support systems for new business founders;
• Credit Builder is our new program, a partnership with Capital One, for assisting new and aspiring business owners, as they improve their credit scores;
• Our RVA Works accelerator alumni recently participated in the "Summer Re-Fresher" on marketing and sales, with programing including expert speakers, mentors and the Kauffman Fasttrac curricula; and
• 1 Million Cups is the Kauffman Foundation's peer learning program for entrepreneurs, and will now have a home in the Robins School of Business, as the University of Richmond joins our group of Richmond-based sponsors.

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We're continuing our work to assist more people pursuing entrepreneurial careers. Please feel free to contact me with any questions on our work to help people start businesses and manage their investments.

Best regards, Dale