Inflation Is Weighing On Small Businesses

Insights | Inflation Is Weighing On Small Businesses

Author: David I. Templeton, CFA, Principal and Portfolio Manager

Today's release of the NFIB Small Business Optimism Survey for March showed the index fell 2.4 points to 93.2. In the survey, 31% of small businesses cited inflation as their single most important problem, up from only 4% a year ago. The category cited as the second most important problem is the quality of labor at 22%. Not surprisingly, this inflation headwind is impacting small businesses' view of the economy with the survey noting, "Owners expecting better business conditions over the next six months decreased 14 points to a net negative 49% (green line in the below chart), the lowest level recorded in the 48-year-old survey."

NFIB Small Business Optimism Survey March 2022, Inflation and economy

Again, the over all Optimism Index declined to 93.2 and is nearing the level reached at the depths of the Covid led economic shutdown.

NFIB Optimism Index, March 2022

Lastly, inflation's impact on small businesses is shown to be a reality as today's report on the March Consumer Price Index has inflation running at a year over year rate of 8.5%, a 40-year high. Core CPI (YoY), which excludes food and energy, was reported at 6.5%. Included on the below chart with the inflation reading is the University of Michigan Consumer Sentiment Index for March, and individual sentiment is being negatively impacted by the higher inflation environment as well. The U of M survey noted,

"Inflation has been the primary cause of rising pessimism...Inflation was mentioned throughout the survey, whether the questions referred to personal finances, prospects for the economy, or assessments of buying conditions. When asked to explain changes in their finances in their own words, more consumers mentioned reduced living standards due to rising inflation than any other time except during the two worst recessions in the past fifty years: from March 1979 to April 1981, and from May to October 2008."

Inflation (CPI) and University of Michigan Consumer Sentiment Survey

The Federal Reserve's monetary policy is attempting to bring inflation down by pushing short term rates higher. The Fed's goal is to accomplish this without tipping the economy into a recession. Our recent Investor Letter contains more discussion on this topic. In short though, inflation is an issue that does not seem to be going away anytime soon. 

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