If COVID defined 2020, then inflation appears to be the hallmark of 2022. Inflations is one of the biggest issues looming over the U.S. economy, businesses, and consumers this year. Over the past 40 years, the inflationary environment has been relatively stable outside of a few blips here and there; however, the first half of the year has seen inflation rates slowly creeping toward levels not experienced since the 1970s.
So how do middle market companies view this situation? The answers may be surprising.
The middle market is (literally) divided on the impact of inflation.
In the latest wave of survey data for the mid-year MMI, we asked middle market companies about the impact of inflation on their businesses. Given all the media coverage regarding rising costs, tightening budgets, and scaling back on capital projects, the hypothesis was that a majority of mid-size businesses are experiencing these same effects. However, our data tells us something a bit different. Across a sample size of 1,000 companies, 39% of firms say they have been negatively impacted by inflation; but the exact same proportion claims a positive effect. The remaining one in five businesses say there has been no impact the last six months.
Where are the positive impacts occurring?
The top area includes wages and salaries – already a key component of workforce and talent management. As the middle market deals with a labor shortage that has only grown worse since the start of 2020, the key driver for attraction and retention of talent has been higher wages. Therefore, inflation pressures have exacerbated a tactic already in play.
Costs of raw materials and goods comes next on the list of positively impacted factors this year, particularly by companies in the Retail, Wholesale, and Construction industries. Many middle market companies supply other industries. While their own supply chain costs have likely increased, they have benefitted from passing costs on to their customers. Of course, the key question here is, how long can that continue without negative consequences?
The negative impacts are not very surprising.
The cost of fuel and (buying) raw materials are by far the biggest concerns expressed by mid-size companies. Other pain points include inventory, shipping/transportation, and utilities costs.
The middle market will chart its own course.
As the Fed tries to control inflation through rate increases, it is likely the middle market will not stand pat waiting for policies to drive action. As seen with past challenges, these businesses typically figure out the best paths forward on their own.