Inflation Continues To Rank As The Top Problem For Small Business

In August, NFIB’s Small Business Economic Trends survey found that 24% of small business owners surveyed identified inflation as the most important business problem they faced, followed by labor quality at 21%. Also in August, the U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) came in at 2.5%. This is far below the 9% recorded in June 2022 and the lowest inflation rate since February 2021. So, what’s the concern? A simple answer is that prices are up 20% (cumulative) since 2021. Although the rate of price increases (inflation) is down, prices are still rising and working their way through the economy. As consumers have discovered, readjusting to 20% higher prices is a continuing problem that is not easily resolved in a short time.

Inflation was a problem through most of the 1970s and early 1980s. It spiked again during the 2008 period which experienced high oil prices, and most recently in 2021 when it was triggered by Covid shortages and massive federal spending (Chart 1). Amplifying the distress, interest rates rose to higher levels reflecting expected inflation in future periods and the Federal Reserve’s “anti-inflation” policies.

Main Street has a major impact on inflation, with over 30 million small firms making price decisions that impact consumers. The percent of firms raising selling prices each quarter (NFIB Small Business Economic Trends) clearly impacts the inflation rate (Chart 2). A regression model confirms and quantifies this relationship:

CPI Inflation = -0.93+ 16.9 * % raising prices last quarter, R2=72%

The percent of small business owners raising selling prices is clearly a good predictor of future inflation. There are two interesting exceptions, one in the early 1980s and the other during the 2022-24 period. In the 1980s, the official inflation readings were well above those anticipated by the percent of owners raising their selling prices. In the most recent period, the reverse is true, BLS reports are consistently below those anticipated by small business price increases. According to reports from the BLS, around 50% of the CPI data is based on imputations, meaning that roughly half of the information used to calculate the Consumer Price Index is estimated, not direct measures of prices; interest rates (important credit prices) are not directly included.

These results suggest that inflation may be higher than the BLS thinks. This would be consistent with the 2022 paper by ex-U.S. Treasury Secretary Lawrence Summers, Marijn Bolhuis, and Judd Cramer.[1] The authors found that methodological changes in the Consumer Price Index (CPI) over time affects the levels of inflation reported and experienced today. They along with other researchers have confirmed that the inflation we are experiencing today, measured by the BLS rules that were in place in the early 1980s, would be as high as the almost 15% reported in March of 1980. Clearly, jumps in price levels this large will cause great stresses for small business and will not resolve easily or rapidly.

[1] Marijn A Bolhuis, Judd N L Cramer, Lawrence H Summers, Comparing Past and Present Inflation, Review of Finance, Volume 26, Issue 5, September 2022, Pages 1073–1100,