Small business owners see inflation as a big problem over the next 6 months

More small business owners expect worse business conditions in six months than an improvement – ​​35% more, to be exact. That’s the grim message of data released Tuesday in an annual survey by the National Federation of Independent Businesses.

From January to October 2016, the Small Business Optimism Index’s prediction for economic conditions in the next six months was never positive. Then, small business owners’ forecasts for the next six months never went negative for more than four years, until December 2020, when they dropped that way. Since then, the prospects have remained under water.

Inflation is the second biggest problem small business owners face (after the quality of the workforce), with 22% saying inflation is their biggest problem.

That’s 21 percentage points higher than the 1% that rated inflation as a major problem a year ago. More alarmingly, this is the highest percentage since 1981.

Inflation is a key ingredient in calculating a country’s economic freedom in the Heritage Foundation’s Index of Economic Freedom; it is the largest contributor to monetary freedom, one of the 12 sub-scores of the Heritage index. The 12 subscores, averaged together, determine the overall economic freedom score for each country listed in the index. (The Daily Signal is the multimedia news organization of The Heritage Foundation.)

Price stability without government interference is the ideal state for a thriving economy. But the Federal Reserve has been inflating its balance sheet for years now.

Total assets held by the Federal Reserve grew from less than $4 trillion as of October 21, 2019, to $8.8 trillion as of January 3, 2022. To put that into perspective, the size of the U.S. economy was not than $20.9 trillion in 2020. The Fed’s $4 trillion in 2019 was already too high.

The Federal Reserve holds mortgage-backed securities, treasury bills, and loans it makes to banks, among other assets. When the Fed buys these items, it does so with money that did not exist before.

This means that more dollars are being created, spreading through the economy, and there are more dollars than before, although the size of the economy has not changed. This dilutes the value of silver and drives up prices.

As the great economist Milton Friedman said:

Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can only be produced by a more rapid increase in the quantity of money than in production.

Friedman argued that you cannot find inflation anywhere in the world where the money supply has not increased, or the growth rate of the money supply has not increased.

Inflation hurts many people – among the poor, who feel the scourge of higher prices; small business owners responding to the National Federation of Independent Business survey; to the saver whose savings quickly become a wasted good.

A small business owner‘s decisions are easier to make when based on accurate information. But runaway price increases in everything from spaghetti sauce to microchips are making business planning pretty unpredictable.

Running or growing a business in a high inflation environment can be economically perilous for a small business owner and make life worse for almost anyone. This is one reason why monetary freedom as measured in the Index of Economic Freedom is a central pillar of economic freedom.

America is a better place because of an increasing number of small businesses, not because of an increasing amount of dollars floating around.

This piece originally appeared in The Daily Signal

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