Dive Brief:
- Nearly three out of four small businesses (73%) flagged inflation as their biggest financial challenge, with 42% identifying tariffs as a leading problem, according to a Federal Reserve survey released Tuesday.
- Forty-eight percent of small businesses import goods and, of those, 84% reported increases in import prices during the previous year, according to the survey by the Fed’s 12 regional banks.
- “Tariffs have already meaningfully increased U.S. prices of imported goods, and the full effects have likely not yet been felt,” New York Fed President John Williams said Tuesday, citing a New York Fed study that found U.S. companies and consumers have shouldered nearly 90% of the burden from import duties. Tariffs have “stalled” efforts to restore inflation to the central bank’s 2% inflation target, he said in a speech.
Dive Insight:
As with tariffs, the widening war in the Persian Gulf may spur inflation if it halts shipments of oil and other commodities for an extended period, according to economists.
“Right now it’s just too soon to know what imprint this has on inflation and for how long,” Minneapolis Fed President Neel Kashkari said Tuesday, referring to the conflict.
The attacks on Iran cast doubt on the advisability of trimming the Fed’s main rate this year, Kashkari said at a Bloomberg-sponsored event, noting that before hostilities he anticipated one reduction in borrowing costs in 2026.
“Now, with the geopolitical events, we need to get a lot more data,” Kashkari said.
Strikes on Iran since Saturday by U.S. and Israeli warplanes have pushed up the price of crude oil and other energy commodities. Futures for Brent crude oil rose 5% on Tuesday after a roughly 8% increase on Monday.
A lengthy conflict in the Middle East may sustain high energy prices, fuel inflation and slow global economic growth.
Williams said he expects price pressures to ease this year, allowing for a reduction in borrowing costs.
“I anticipate inflation to start coming back down later this year when the peak effect of tariffs on the inflation rate is behind us,” he said.
“If inflation follows the path I expect, further reductions in the federal-funds rate will eventually be warranted to prevent monetary policy from inadvertently becoming more restrictive,” Williams said.
Regarding tariffs, three out of four (76%) small businesses have passed on the cost of the import taxes to customers and 60% have absorbed either all or part of the cost, the Fed found in its survey. Only 13% of the companies reported shifting from foreign to domestic vendors.
Sixty-nine percent of retailers and 62% of manufacturers noted challenges stemming from tariffs, the Fed said.
The Fed gathered 6,525 responses from small businesses with from one to 499 full or part-time employees. It conducted the survey from early September through mid-November 2025.
