The Fed Just Confirmed Your Cost Pain

The Federal Reserve surveyed 6,525 small businesses between September and November 2025. The top finding was not a surprise: 73% named inflation as their biggest financial challenge. Another 42% called tariffs a leading problem. You already knew costs were up. What matters is what happened next.

Two cost shocks landed in the same window. Tariff rates on imports climbed, and then U.S. and Israeli strikes on Iran pushed Brent crude futures up 13% in just two days. That means energy and freight costs spiked at the same time import prices were already rising. If you buy anything that crosses a border, or anything that rides on a truck, both sides of your cost structure moved against you at once.

New York Fed President John Williams put it plainly:

“Tariffs have already meaningfully increased U.S. prices of imported goods, and the full effects have likely not yet been felt.”

This is not a recap of macro news. It is about three specific traps that small business owners fall into when costs spike like this. And it ends with a one-hour diagnostic you can run this week to find your biggest exposure before the next price increase hits.

You Don’t Have to Import to Pay Import Prices

The tariff pain is not spread evenly, as the chart below shows. Retailers got the worst of it: 69% flagged tariffs as a challenge. Manufacturers were close behind at 62%.

But here is the number that should get everyone’s attention. Forty-eight percent of all small businesses in the survey import goods. That is nearly half. And 84% of those importers reported higher prices over the past year. Many of those owners did not think of themselves as importers. They just bought packaging, ingredients, parts, or electronics from a vendor who happens to source overseas.

Even if you run a service business, your costs are not insulated. Your printer imports toner cartridges. Your equipment supplier imports components. Your fuel vendor’s price tracks global crude oil. Since the new Section 122 import tariff took effect, those costs flow downstream whether you personally signed a customs form or not.

Why ‘Just Switch Suppliers’ Doesn’t Work on a Tuesday

The obvious advice when import prices spike is to find a domestic supplier. A New York Fed study found that U.S. companies and consumers shoulder nearly 90% of the cost burden from import tariffs. In plain terms, almost none of the extra cost falls on the foreign sellers. American businesses pay it. So switching to a domestic vendor sounds like a clean escape.

Except only 13% of small firms actually made that switch.

That is not because owners are lazy or uninformed. It is because changing suppliers is slow and risky. If you run a bakery and your chocolate supplier’s prices jumped 20%, you cannot call a new vendor on Tuesday and have comparable chocolate by Thursday. You need to request samples, test the product in your recipes, negotiate payment terms, set up accounts, and wait for delivery timelines to stabilize. That process takes months, not days.

The legal landscape around tariffs is also shifting. Courts have already weighed in on some tariff authorities, and recent Supreme Court rulings on tariff policy could change which duties stick and which get rolled back. Locking into a new domestic supplier at a premium price right before a tariff gets reversed would leave you paying more for no reason.

So the first failure mode is this: assuming you can source your way out of a tariff problem on a short timeline. For most small businesses right now, that option does not exist fast enough to help.

Here is the math that most owners are not doing.

The Quiet Math Behind ‘Split the Difference’

According to the Fed survey, 76% of small businesses that import are passing at least some tariff costs to their customers. At the same time, 60% are absorbing some of those costs themselves. Those two numbers overlap heavily. Most owners are doing both: raising prices a little and eating the rest.

That feels like a reasonable compromise. It is also the second failure mode, because the math is worse than it looks.

First, a quick definition. Your margin is the money left over after you subtract your costs from your revenue. Think of it as how many cents you keep from every dollar that comes in. On a $500,000 business with a 20% margin, you keep $100,000 before taxes and your own paycheck.

Now imagine your costs go up 10% across the board. Your costs were $400,000. Now they are $440,000. You decide to split the difference: raise prices 5% and absorb the other 5%.

• Your new revenue (after a 5% price increase): $525,000
• Your new costs: $440,000
• Your new margin: $85,000

You just lost $15,000 in annual margin. That is a 15% drop in the money you actually take home, from a cost increase you thought you were “splitting.” And this is the optimistic version, where your customers accept the 5% price hike without buying less.

The trap gets worse when you realize this is not happening on one line item. It is happening on packaging. And shipping. And raw materials. And fuel. Each one gets the split-the-difference treatment, and each one quietly shaves another slice off your margin. Owners who made difficult cost decisions heading into 2026 and tracked these numbers early are in a much stronger position than those who absorbed by default.

• A 5% absorption on five different cost categories can add up to a 10-15% total margin hit
• The loss compounds because each absorbed cost reduces the dollars available to cover the next one

For context, the Atlanta Fed’s February 2026 survey found that firms expect to raise prices by a median of 3.0% over the next 12 months. If your costs are up 10% and you are only planning a 3% increase, the gap is coming straight out of your margin every single month.

The Fed Says Relief Is Coming. Your Cash Can’t Wait.

“I anticipate inflation to start coming back down later this year when the peak effect of tariffs on the inflation rate is behind us.”

That is John Williams again, and it is a genuinely hopeful signal. The Atlanta Fed’s data backs it up: businesses expect their unit costs (the cost to produce one unit of their product or service) to rise only 1.9% over the next year. That is below recent peaks.

These numbers suggest the worst of the tariff-driven price increases may pass. The gap between owner optimism and actual conditions has been a recurring theme this year, and the hopeful forecast deserves honest acknowledgment.

But here is the third failure mode: treating a maybe-temporary spike as definitely temporary and doing nothing while you wait.

Plenty of owners took that approach in 2022 and 2023. They held prices steady, expecting inflation to pass. For many, it did eventually ease. But their margins never recovered because they never repriced. Customers got used to the old prices. The window to adjust closed.

Think of it like a roof leak. The forecast says rain stops Thursday, but the water damage happens Monday through Wednesday. You fix the leak now even if the weather improves later. Minneapolis Fed President Neel Kashkari added another wildcard when he noted that the Iran conflict makes the inflation timeline even harder to predict: “Right now it’s just too soon to know what imprint this has on inflation and for how long.”

Waiting for certainty is itself a decision. And it is usually the most expensive one.

How 76% of Owners Are Already Repricing (and How to Do It Without Losing Customers)

If raising prices feels uncomfortable, remember that 76% of importing small businesses are already doing it. Your competitors are adjusting. Your customers are seeing price increases everywhere. You are not the outlier for repricing. You are the outlier if you don’t.

If your costs are up more than 5% and you have not adjusted prices in 90 days, you are already late. Costs do not wait for your next quarterly review. Pull the numbers now and decide now. A delayed price increase means every sale between then and now was sold at the wrong margin.

Raise prices on your newest customers first. They have no anchor. A customer who has been with you for three years remembers your old price. A customer who found you last month has no basis for comparison. Start there, and use the response to calibrate before adjusting for longer-term accounts.

Add a line-item surcharge instead of raising your base price. A surcharge is a separate fee on the invoice, labeled clearly: “fuel surcharge” or “materials surcharge.” It works better than a base price increase for two reasons. First, it explains itself. Customers can see exactly why the total is higher. Second, you can remove it later without the awkwardness of lowering your headline price. When costs drop, you simply drop the surcharge. For B2B firms, consider adding a cost-escalator clause to new contracts that ties your price to a published index, so adjustments happen automatically.

Your One-Hour Cost Diagnostic (Do This Week)

This is not a full financial overhaul. It is a diagnostic. Set aside one hour this week and check five things:

The 73% stat from the Fed survey is not just a headline. It is 6,525 businesses telling you what your own bank account already confirmed. Two cost shocks hit in the same window, and the owners who come through with their margins intact will be the ones who stopped splitting the difference and started making real adjustments this month.