By Safiyah Riddle

U.S. small business confidence climbed to a seven-month high in June as pessimism about the economic outlook diminished sharply and sales expectations improved, but a still-tight labor market continued to drive concerns about inflation, according to a survey released on Tuesday.

The National Federation of Independent Business (NFIB) said its Small Business Optimism Index rose 1.6 points to 91 last month, the greatest month-to-month improvement since August 2022.

Small businesses recorded their least-pessimistic view of near-term economic prospects since February 2022 as NFIB's general business conditions outlook index climbed 10 points to negative 40. U.S. small businesses have had a net negative view of the business climate since December 2020, the month after Donald Trump lost his re-election bid as U.S. president.

Sales expectations improved somewhat as well. A smaller net percentage of business owners expect weaker sales in the next three months than in May, lifting the overall sales outlook to the highest in four months.

Inflation remained neck-and-neck with finding quality workers as business owners' single most important problem, though concern about price pressures are easing from where they were a year ago. In June, 24% percent of small business owners labeled inflation as their biggest headache, down from 25% in May and 13 points lower than last July's peak, which was the highest reading since the fourth quarter of 1979.

Overall, a seasonally adjusted 29% of owners raised average prices, the lowest reading since March 2021 and down 3 points from May, but still an inflationary rate.

Despite the improved economic outlook, June was the 18th straight month that the index stayed below the 49-year average of 98. Small businesses continued to struggle with the cost and quality of labor amidst a slowing but still-tight job market.

The NFIB survey showed 42% of owners reported job openings that were hard to fill, down 2 points from May, but still historically high. A net 15% planned to create new jobs in the next three months, down 4 points from May. The majority of small business owners who were concerned about inflation cited labor supply as the greatest concern.

“Inflation and labor shortages continue to be great challenges for small businesses. Owners are still raising selling prices at an inflationary level to try to pass on higher inventory, labor, and energy costs,” NFIB Chief Economist Bill Dunkelberg said in a statement.

Although hiring slowed in June, when the Department of Labor reported the smallest increase in nonfarm payrolls in 2-1/2 years, wage growth remained strong at 4.4% year over year.

Government data on Wednesday is expected to show the Consumer Price Index rose by 0.3% in June after an increase of 0.1% in May, according to a Reuters survey of economists. In the 12 months through June, CPI inflation is forecast to fall to 3.1% from 4.0% in May. A year ago in June, annual inflation hit a 40-year high of 9.1% as measured by the CPI.

Economists expect the Fed will resume interest rate hikes in July, after skipping an increase in June. The central bank has raised rates by 500 basis points since March 2022.

(Reporting by Safiyah Riddle; Editing by Andrea Ricci)