In May, the Consumer Price Index (CPI) rose 8.6%, which is the highest growth the U.S. has seen since 1981. The report was discouraging because it shows that inflation remains high and likely hasn’t yet hit its peak.

High inflation isn’t just problematic for consumers — it also hurts small businesses. When inflation is high, companies have smaller margins to work with and can experience a decline in profitability. 

A recent report shows that inflation is making hiring more challenging for small businesses. In particular, small businesses with fewer than 50 employees are struggling to compete with the wages and benefits offered by larger companies. 

How Inflation Is Affecting Hiring

Over the past year, hiring has been a challenge for companies of all sizes as employees quit their jobs in record numbers. Businesses were forced to spend more money to attract and keep qualified employees.

According to data from Vistage, 76% of small businesses increased employee wages while 44% added additional benefits. But now, rising inflation has made it harder for small businesses to offer competitive salaries and keep up with larger companies.

The hiring problem has only worsened with the increase in remote workers. Companies in big cities can recruit workers in other states with lower pay scales. That means small businesses aren’t just competing with firms in the same geographic location — they’re competing with companies across the U.S.

Overall, ADP payroll data found that small business growth has declined in three of the last four months, while larger firms continue to grow and bring on new employees. 

Staffing Shortages Hurt Small Businesses

Staffing shortages can affect small businesses in a number of ways. When companies can’t stay fully staffed, they may have to turn down potential work due to a lack of resources, causing their growth to stagnate.

Plus, staffing shortages make it harder for companies to retain the employees they already have. Since businesses can’t schedule as many employees to work, their current employees are spread thin.

Staffing shortages can also lead to lower production, service delays, or missed deadlines, which can cause additional customer service problems. When customers are dissatisfied and complain more frequently, this can lead to higher employee turnover rates.

Small Businesses Are Uncertain About the Future

Small businesses that are struggling to compete could find some breathing room in the coming months. Reports show that many larger companies that did well during the pandemic are starting to scale back on hiring, which could give small businesses an opportunity to catch up.

But, if the anticipated recession hits in 2022, small businesses will also be forced to scale back on hiring. The Vistage data shows that most small business owners are concerned about what will happen with the economy in the coming year. Only 9% expect economic conditions to improve, compared to 53% in June 2021.