Inflation pressures squeeze small businesses, driving optimism to historical low

(TND) — Inflation is the driving force in a historically low Small Business Optimism Index, a National Federation of Independent Business official said Tuesday.

The NFIB’s index, updated monthly for nearly 40 years, was 88.5 in March.

That’s the lowest level since December 2012 and the 27th consecutive month below the long-term average of 98.

Small business owners are pessimistic, stressed and stretched thin, said NFIB Executive Director of Research Holly Wade.

A Small Business Optimism Index this low would typically be associated with a recession, she said.

“But this picture seems to have much more to do with inflation,” Wade said.

She called inflation the “uninvited guest that won't leave.”

Inflation and labor quality concerns shared top billing for a while. Now, inflation is the clear top concern.

A quarter of small business owners surveyed in March cited inflation as their most important problem.

Another 18% said labor quality was their chief concern, which was down from 23% a year ago.

“The labor market has eased up a bit,” Wade said.

But she said finding workers is still a challenge, especially in the transportation and construction sectors.

Unfilled job openings have remained high, though hiring plans have dropped to about 2016 levels, she said.

Inflation has cooled, but it’s really taken its toll on small business owners over the last few years.

There are different measures of inflation. The widely cited consumer price index is currently up 3.2% over last year, far off its peak of 9.1% in June 2022.

And the personal consumption expenditures price index last came in at 2.5%.

Both are still higher than the Federal Reserve’s target of 2% inflation.

Bankrate Chief Financial Analyst Greg McBride previously told The National Desk that households are paying 20-25% more for things than they were in 2020.

That’s the cumulative effect of inflation, even if the rate of increase has slowed.

And small businesses are dealing with the same cost strains.

“Over the last month, from February to March, more business owners are saying that they increased their prices, increased compensation, more are planning to increase prices and also compensation,” Wade said. “So, these price pressures are still very relevant on Main Street, and they're frustrated. They're frustrated with this persistent inflation issue that they've had to deal with for over two years now.”

Wade said the drop in the Small Business Optimism Index, down 0.9 of a point in March, was predominantly because of the drop in sales expectations.

And those expectations of lower sales were dominated by construction and retail businesses, she said.

Construction is one of the sectors that has the most unfilled job openings. Wade said construction company owners might be anticipating lower sales because of a slowdown in buyers or because they can’t get enough help to complete as many projects.

Wade said most small business owners have never had to deal with this level of inflation, and that’ll be the key thing to watch for them in the coming months.

“Further easing would go a long way in helping small business owners kind of get their feet under them,” she said.