There is a folk etymology of the word ‘Hobbit’, appearing in several essays in that book of essays 'Tolkien and the Critics' I was reading a while back, which suggests it might be derived from ‘Hobb’ and ‘rabbit’: hence, echoes of Robin Goodfellow and Flopsy and Mopsy et al.
However, I am sure that I read somewhere that Tolkien himself said once that it may have been inspired by ‘hole’ and ‘Babbitt’. This suggests to me that Tolkien was not at first perhaps so fond of hobbits as he later became.
Here is Exhibit A, the first appearance of Babbitt in the book of the same name, for you to compare with Bilbo’s first appearance:
There was nothing of the giant in the aspect of the man who was beginning to awaken on the sleeping-porch of a Dutch Colonial Houses in that residential district of Zenith known as floral heights.
His name was George F. Babbitt. He was forty-six years old now, in April, 1920, and he made nothing in particular, neither butter nor shoes nor poetry, but he was nimble in the calling of selling houses for more than people could afford to pay.
His large head was pink, his brown hair thin and dry. His face was babyish in slumber, despite his wrinkles and the red spectacle-dents on the slopes of his nose. He was not fat but he was exceedingly well fed; his cheeks were pads, and the unroughened hand which lay helpless upon the khaki-colored blanket was slightly puffy. He seemed prosperous, extremely married and unromantic; and altogether unromantic appeared this sleeping-porch, which looked on one sizable elm, two respectable grass-plots, a cement driveway, and a corrugated iron garage. Yet Babitt was again dreaming of the fairy child, a dream more romantic than scarlet pagodas by a silver sea.