Inflation Of Oil Prices Devastates Small Businesses, Could Indicate Disturbing Trend

Small businesses are feeling the effects of inflation as rising gas prices have hit an all-time high at $4.17 per gallon. Economists worry that this surge in oil prices and their consequent impact on the small business sector could have negative effects.

Inflation has been an enormous issue for small businesses recently; February’s Consumer Price Index is almost 8% higher than it was this time last year, which is the highest it’s been since January of 1982. Specifically, energy has influenced inflation; AAA reports that gas prices are up 53% since last year and 24% in the past month alone. These prices drive up the cost of materials, drive down the potential for organic walk-in traffic if consumers are going out less to conserve gas, and serve as an added cost for small businesses reliant on transportation.

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For small businesses that rely on their own vehicles to deliver goods, pick up supplies, take employees to work or to clients’ offices, gas prices are a painful reminder of how inflation impacts bottom lines. The National Federation of Independent Business’ Small Business Economic Trends report stated that more than 26% of small business owners believe inflation is their biggest issue. An additional 57% of respondents said their increased capital spending, including new equipment or vehicles, is their most significant expense.

Some economists are concerned that inflation could indicate a disturbing trend seen throughout American history: oil price surges precipitating a recession. Economist James Hamilton argued that the rise in oil prices was a factor that influenced the Great Recession in 2008, among other instances, such as the 1973 OPEC embargo or the 1980 Iran-Iraq War. Additionally, Natixis CIB Managing Director and Chief Economist Joe LaVorgna believe that increased food prices also skyrocket as oil prices rise, influencing a potential recession.

“Recessions were often linked to oil price surges,” macroeconomics Professor Vivekand Jayakumar told The Hill. “Driven by inflationary concerns, central banks may hike interest rates in response to a surge in oil price and, thus, contribute to a potential slowdown in economic activity.”