Inflation and labor shortages continued to put pressure on small businesses as the Small Business Optimism Index in December remained below its pre-pandemic level, up only 0.5 points to 98.9, according to a report from the National Federation of Independent Business on Tuesday.
Nearly a quarter, or 22%, of all surveyed firms saw inflation as “the most important problem, a 20-point increase from the beginning of 2021,” the report said. The data was taken before the effect of the omicron variant could be felt.
High inflation prompted firms to increase their selling prices as those businesses reporting higher prices stayed elevated at 57%. At the same time, firms with positive earnings trends continued to be under water at negative 14% on the month as increasing material and labor costs ate into profit margins. Those margins had already been tight for small businesses amid stiff competition.
Rising labor costs were also attributed to the competitive labor market where firms increased compensation to retain and attract workers. A net 48% of surveyed owners reported increases in compensation, 4 points higher than November and the highest reading in the 48 years of the survey. A net 32% planned to raise compensation in the next three months.
The struggle to fill vacant job positions remained a concern as a net 49% of firms reported unfilled positions in December. To put this into context, the number of unfilled job openings stayed far above the 48-year historical average of 23%, according to the NFIB.
The takeaway
Since the impact of the omicron variant did not appear in the December report, it is highly likely that in the next two months, we will see substantial downside risks to business optimism, especially with respect to small businesses, which are more vulnerable to COVID-19 shocks.
With inflation estimated to peak in the first quarter, small firms are expected to continue to feel the pressures from elevated price levels in the coming months.
