July 13, 2004 -- Falling inventories and rising prices are starting to weigh heavily on the minds of small business owners, according to the National Federation of Independent Business.

The NFIB's Small Business Optimism Index dropped 1.5 points to 103 in June after falling nearly a point in May. While a reading above 100 is considered strong, firms are growing less confident that the economy will be able to improve on its current performance.

Strong demand has gobbled up inventories and triggered price hikes, with the number of owners reporting higher prices jumping 31 percent since January.

"The small business 'pricing party' is in full swing," said William Dunkelberg, chief economist for the NFIB. "Price hikes haven't been this prevalent since the third quarter of 1981."

Overall, 35 percent of all firms reported higher average selling prices, while only 7 percent made cuts. Many expect increased prices to cool sales, with those anticipating higher real sales dropping four points from May to 26 percent.

The survey found that a near-record nine percent of firms plan to add inventories, up two points from May. However, because of strong sales, the NFIB fears that producers are going to be unable to meet current demand, let alone build inventories.

One surprise to the NFIB was a 4-point drop in the number of firms planning to increase capital spending, with 28 percent now planning to increase outlays. The group attributed the dip to the fact that two-thirds of firms had already increased capital spending over the past six months.

Small businesses have continued to add workers, but, for the last three months, price hikes have been reported more frequently than compensation increases, according to the report. As a result of prices outpacing labor expenses, businesses are improving their bottom lines.