June 13, 2023: According to a survey by the National Federation of Independent Business (NFIB), many small businesses worry about inflation and future business conditions. This could challenge the Federal Reserve, which aims to control inflation consistently above its 2% target. Although price increases have slowed in the past year, if more business owners become concerned about inflation in the coming months, it may be difficult for the central bank to bring it down, potentially impacting Americans’ living standards.
The Federal Reserve monitors inflation expectations to gauge whether consumers have become accustomed to higher inflation levels. If this is the case, managing it becomes more challenging and may erode living standards. To determine these expectations, officials examine various sentiment surveys, including a recent one revealing that consumers’ near-term inflation expectations in May were at their lowest level in two years.
Bill Dunkelberg, the NFIB’s chief economist, noted that small business owners are expressing concerns about future business conditions. Supply chain disruptions and labor shortages continue to limit the ability of many small firms to meet the demand for their products and services, although the situation is less severe than last year.
The survey showed that while small business optimism improved in May, it remained below its historical average for the 17th consecutive month. The share of small business owners expecting better business conditions in the future declined, while the proportion reporting inflation as their most significant operational challenge increased.
Inflation has moderated since reaching a 40-year peak a year ago, with a rate of 4.9% for the 12 months ending in April. The Bureau of Labor Statistics will release its Consumer Price Index for May later on Tuesday. The Fed’s preferred inflation measure has also shown a cooling trend recently, although April’s reading unexpectedly ticked up.
The Federal Reserve has raised interest rates ten times since March 2022 to combat inflation. So far, it has brought down inflation without causing significant disruptions in the labor market. Hiring continues, and the NFIB’s May survey revealed that 44% of owners reported difficulties filling job openings, remaining historically high but slightly down from April.
Other surveys have confirmed this trend. The Fed’s Beige Book, a compilation of responses from businesses nationwide, highlighted the challenges faced by a textile manufacturer struggling to hire younger workers to replace retirees, as new hires tend to be in their fifties.
The NFIB’s May survey results are unlikely to surprise the Federal Open Market Committee, the group responsible for setting monetary policy at the Fed. Officials remain confident that inflation expectations are under control. The Fed will announce its next interest rate decision on Wednesday.
Fed Chair Jerome Powell emphasized in a recent news conference that despite elevated inflation, longer-term inflation expectations seem to remain stable, as indicated by various surveys of households, businesses, forecasters, and market measures.