Small businesses face cost pressures from tariffs and inflation, Fed survey shows

Investing.com -- U.S. small businesses faced significant challenges from rising costs linked to tariffs and inflation in 2025, according to a Federal Reserve report released Tuesday.

The 2025 Small Business Credit Survey, conducted by the 12 regional Fed banks, found that increased costs of goods, services and wages were the most common challenge for smaller firms last year.

More than 40% of firms surveyed said higher costs associated with tariffs posed a financial challenge, with retail and manufacturing businesses experiencing the most pressure. Among firms dealing with tariff-related cost increases, 76% passed on some of the higher costs to customers while 60% absorbed part of the expense.

Nearly half of the surveyed firms reported sourcing at least some inputs from outside the United States. A large majority of those firms said foreign inputs increased in price between 2024 and 2025, according to the report.

Businesses did not respond to higher costs by changing suppliers or relocating operations within U.S. borders, the survey found.

The tariff system implemented under President Donald Trump contributed to inflation in 2025, with Fed officials linking much of the overshoot of their 2% target to the tax increases. Most Fed officials expect the tariff impact to diminish this year.

The Trump administration has maintained that tariffs are paid by foreign entities and are intended to bring industry back to American shores while generating government revenue. The tariffs have also been used as a foreign policy tool.

Recent reports from the New York Fed and the Congressional Budget Office found that tariffs are almost entirely borne by those within U.S. borders, contrary to the administration's position. A Supreme Court ruling determined that Trump's tariffs exceeded his authority, though the president subsequently imposed additional tariffs on incoming goods.

The Fed survey also examined artificial intelligence adoption among small businesses in 2025. Just under half of small firms are using AI, with 15% planning to add the technology within the next year. The primary uses for AI include writing and marketing, followed by individual productivity enhancement.

AI did not change labor costs but improved productivity for many firms, the report said.

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