Small business optimism falls as inflation, tariffs and Iran conflict bite

Small-business owners turned more defensive in May as inflation worries, tariff uncertainty and the Iran conflict pushed the National Federation of Independent Business optimism reading further below its long-run norm. The Small Business Optimism Index fell 0.6 points to 95.3, under the 52-year average of 98.0, while the uncertainty index jumped to 91, well above its historical average of 68.

The pressure showed up most clearly in pricing. NFIB said 34% of owners expected to raise prices over the next three months, the highest share since July 2022, and 36% said they had already raised prices, the strongest reading since March 2023. Labor costs were named as the single most important problem by 14% of owners, a survey record, while labor quality fell to 13%, its lowest since December 2016. NFIB also said 70% of small-business owners reported supply-chain disruptions affected their business to some extent, underscoring how fragile margins remain for firms with less room to absorb higher fuel, freight and input costs.

Hiring plans weakened further. NFIB’s employment index slipped to 100.3 from 100.4 in April, below the 2025 average of 101.2, and a net 9% of owners planned to create new jobs in the next three months, the lowest since May 2020. At the same time, 29% reported job openings they could not fill, also the lowest since May 2020. TD Economics said six of the 10 NFIB optimism subcomponents deteriorated in May, with the sharpest declines in labor-market measures and in expectations for higher real sales.

The broader economic backdrop helps explain the caution. The U.S. Bureau of Labor Statistics said the Consumer Price Index rose 0.5% in May and 4.2% over the prior 12 months, with energy prices up 3.9% in the month and accounting for more than 60% of the monthly increase. That matters for Main Street because fuel costs ripple quickly through delivery, inventory and operating expenses, especially for firms with thin margins and limited bargaining power.

Geopolitical risk added another layer of strain. A Congressional Research Service analysis said roughly 27% of global maritime trade in crude oil and petroleum products and about 20% of global LNG trade passes through the Strait of Hormuz, and warned that a prolonged disruption would create severe upward pressure on oil prices. It said U.S. and Israeli military operations against Iran since February 2026, along with Iranian actions in the Persian Gulf, had heightened concerns over oil and natural gas markets. NFIB’s May survey, based on a random sample of 5,000 members, suggests those shocks are already changing hiring, pricing and investment decisions before they fully reach the headline growth numbers.