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NFIB Research Foundation Reports: Small Business Feeling the Pain of Rising Inflation

Author: K. Mullis Date: July 26, 2011

Each month, the NFIB Research Foundation conducts the Small Business Economic Trends survey that tracks the health of the small business economy. The Index of Small Business Optimism is a combination of 10 variables from the survey, including hiring plans, capital spending plans, earnings and general expectations for sales, and economic growth that provide a general measure of the factors that will shape spending and hiring in future months.

Since March 2009, the Index has trended slowly upward—until recently. Beginning in March 2011, the Index declined three months in a row—hardly an inspiring turn of events. While poor sales remains the predominate issue for the majority of small business owners, inflation is beginning to show its face on Main Street, with one in 10 citing it as their No. 1 business problem.

After a long winter of price hikes for oil, produce and other commodities, there is increasing evidence that the number of small businesses that are feeling the pains of inflation is rising. In February, NFIB’s survey data showed a dramatic reversal of the record 25 months of price reductions that characterized the financial meltdown.

With more small business owners able to increase the price of their goods and services, the data showed improved earnings for many owners. At the height of the recession, 24 percent more small business owners cut prices than raised them whereas now, 15 percent more owners are raising prices than cutting. A similar trend is also occurring in the survey’s earnings data. At the height of the recession, 47 percent more small business owners reported lower earnings than those reporting higher, which has improved to 23 percent. This figure is still low, but the trend suggests significant improvements on Main Street.

However, inflation is a two-edged sword. While higher selling prices improve earnings, price increases through the back door (i.e., higher energy costs, raw materials, etc.) impair cash flow and profits and add to the many problems small business owners face in emerging from the recession.

And unfortunately, more and more owners are reporting inflation as their top business problem. Last year, only 4 percent of small business owners reported inflation as their most serious business problem, whereas 10 percent do so now. This 6 percentage point increase clearly indicates that inflation is a growing concern. The NFIB model now anticipates a stronger push on the core inflation measures, not a good sign for strong growth prospects in the future and bad news for the inflation worriers at the Fed.

But will inflation spur a double-dip recession? All eyes are on the price of oil. In early 2008, a barrel of oil cost $134, much higher than the current cost of $103. But the economy is much weaker now than in early 2008, due to a staggering backlog of foreclosures and an administration not knowing where to turn to help the stagnant economy. With the addition of new costly regulatory burdens, including the new healthcare law, the small business economy is in a precarious position of walking the recovery tight rope. Higher oil prices are like taxes. Every dollar increase in the price of oil is a multi-million dollar tax on consumers, resulting in weaker sales.

Tune into CNBC’s “Squawk Box” on the second Tuesday of each month to see NFIB Chief Economist Bill Dunkelberg release the latest SBET report and talk about the state of small business. You can also watch him discuss economic matters and their impact on small business at NFIB.com/video.

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