The number of small businesses saying they raised their prices fell in June to its lowest level since March 2021, according to a survey released Tuesday by the National Federation of Independent Business.
The share of respondents who reported higher prices dropped by three points last month to 29%, "still a very inflationary level but trending down," the report showed.
The drop was partly due to declining commodity prices, according to Kieran Clancy, senior US economist at Pantheon Macroeconomics, in an analyst note, but it also signals a "material downshift" in core services inflation excluding rents "over the next year or so," he said.
Federal Reserve officials are concerned that inflation is not yet on a solid track toward its 2% target, with core service inflation remaining stubbornly high. That's the argument for additional action from the Fed.
A still-tight labor market
The survey also showed that 42% of small firms surveyed said they had job openings that were hard to fill, down from the previous month's share, but remaining at a historically high level. More than 90% of small-business owners said they had few or no qualified applicants for their available jobs.
"Inflation and labor shortages continue to be great challenges for small businesses," said the NFIB's chief economist Bill Dunkelberg in a release.
The current tight labor market has been keeping pressure on employers to raise prices to protect their margins — a dynamic that Fed Chair Jerome Powell discussed in recent remarks. Research argues that the Fed has no choice but to slow the economy further because of the tight labor market's persistent impact on inflation.
Employers added 209,000 jobs in June, a strong gain but much weaker than the prior month's. Wage growth was flat last month and the unemployment rate edged down.
Most Fed officials expect two more quarter-point rate increases this year, according to their latest set of economic projections, and a hike later this month seems likely.
The impact of improving supply chains
The economy has slowed from its red-hot pace after rebounding from the pandemic, but some dynamics that prompted businesses to raise prices have been slowly unwinding.
However, some businesses continued to report a difficulty in accessing credit, with 6% saying "their last loan was harder to get than in previous attempts."
Supply chains are in better shape and prices at the factory gate have declined sharply in recent months, which eases pressure on businesses to raise prices. Hiring has also become easier, meaning some businesses may not have had to offer higher wages to compete for talent.
And some businesses aren't passing on higher costs to customers as often.
"What I'm hearing [from businesses] is that there are signs the economy is slowing," San Francisco Fed President Mary Daly said Monday during a moderated discussion. "Here's an example: It's easier to find workers than it was last year, and then right after that, they say, but it's still hard. Input prices aren't rising as fast as they were last year, but they're still rising. It's not as easy for me to pass along cost increases to final goods or my sales, but I still can."