I don't really understand why they make the race small instead of tiny, but then give it the ability to go through inch-wide spaces. If they made it so the race can switch between small and tiny at will, that'd be an interesting mechanic, but this feels like the designers of this are so worried about not breaking the norm of medium and small races that they're metaphorically tripping over themselves. This feels similar to the Centaur race being medium instead of large, but that could have been chalked up to regional differences. This instance just feels weird that they're only allowed to become an inch-small when entering a small space. At that point, why not just let them do it regularly, or just be that size? I hope/wish the design team would be more creative with their creations, because no matter how bonkers it is, DM's can always disallow something if they feel it's not proper for their game.

How would a tiny creature wield gear built for small/medium humanoids?  

As far as the fey passage or whatever they're calling it, I wrote this in another thread, which allowed me to think more on how Fey and the Feywild work in my campaign.  The tl;dr is that all action of the Fey and in the Feywild is literally more than what it seems to prime material mortals, because said prime materials mortals sense are so narrowed compared to the vibrancy of the fey.

Fey in contemporary iconography and fandoms seem to be popular because of association with fluidity and uncanny, and this fairy ability has the potential to really embrace that.  As a result, I actually like the idea of fairy being given powers that have a mechanical effect (basically the swarm and some tiny ability to make passage through the proverbial mouse hole) and not have it be explicit, I guess I'd prefer a table to inspire as they do with the fairy descriptive traits.  But ultimately I like the idea of fairy having powers that actually defy sense and logic to the mortal observer.  Maybe your mind pieces together "sparkle motion" or constituting into a mini swarm between point a and b, or some really elastic transfiguration to make their way across, and maybe it's the sort of thing that's dependent on the observer, and different observers could witness different things in the same moment.  Feywild seems to be often evocative of the hyper real and surreal, and its dynamic environment where a lot of things can happen and a lot of things do happen, and a prime material humanoid's ability to literally make sense of it is often at a loss so there's a perpetual hallucinatory or dream like quality to things.  

I just hope that the flavor/lore texts of whatever work this appears in, assuming it survives, push players imagination that way as it seems necessary for players to embrace it.  

In other words, a one inch opening is all the space a Fey needs to move from outside an enclosed space to inside an enclosed space.  It doesn't necessarily mean the fey actually moves through the opening, but it probably looks that way for a prime material mortal to make sense of it, and even then said prime material humanoid is still really confused.  

Fey can be creepy.

The game starts breaking down oddly when you consistently run with something other than Small or Medium. Yes, its the same thing as when they did the Centaurs, and the answer pretty much remains the same. Its a limit of the game system that they didn't realize at the time of writing the 5e book. 

If you have a problem with the way that they represent smaller-than-Small...  well, this is a playtest document.  The whole point is to get feedback, not create a mechanically perfect on first try to give out for free option. 

Kobolds are the currently the shortest/smallest a min 2 ft height in the small category.  So we could say the fey are that small easy.  The kobolds don't have funky rules either.