Small business optimism took a hit last month, with owners seeing lower earnings and growing less confident about the short-term future.

The National Federation of Independent Business released its August Small Business Optimism Index this week, which registered 91.2 — a 2.5-point drop from July.

The index has stayed below the long-term average of 98 since late 2021.

“The overall mood is fairly pessimistic,” NFIB Executive Director of Research Holly Wade said Wednesday.

Some encouraging improvement from July was erased, pulled down in August by negative earnings trends and poor expectations of business conditions and sales.

NFIB’s Uncertainty Index rose to 92, its highest level since October 2020.

Inflation was cited as the top concern by small business owners. About a quarter of owners surveyed picked inflation as their most important problem, essentially unchanged since last year.

A new Labor Department inflation report Wednesday showed continued cooling of prices, with annual increases hitting a three-year low.

Wade said the magnitude of inflation pressure has eased on small business owners, but prices are still much higher than a few years ago.

“It’s a bit of getting used to this new normal, which is incredibly painful,” she said.

Business owners are still grappling with inflation in their day-to-day activities and struggling to absorb higher costs. Some have cut back operations, Wade said, while others cut employee hours.

The main way they account for higher costs is by raising prices, but small businesses are wary of driving away customers suffering from “inflation fatigue.”

Another 21% of small business owners said labor quality was their biggest problem, and 13% cited taxes.

Retaining current employees is a significant challenge, Wade said.

Fewer are planning to hire, but a “historically high” 40% of small business owners have an open position.

Many owners aren’t trying to expand but need to find workers to backfill losses, Wade said.

Labor shortfalls are greatest in construction, manufacturing and transportation sectors, she said.

Small business owners are still raising wages, Wade said.

“They sure are, yes,” she said. “They need to compete. Whether it’s filling open positions or retaining their current workforce.”

Federal Reserve policymakers will meet next week and are generally expected to cut their benchmark interest rate after a series of 11 increases intended to tame inflation.

Wade said small business owners can access financing, but it’s more expensive. They are rooting for interest rate cuts to accompany lower inflation.