Yea this should be "short lady" not "small lady." The lady in question isn't being compared to another object (so she can't be smaller) and I'm 95% sure they're referring to her height in this sentence, in which case she would be short, not small.
Small is about size. Short is about height. Something, or someone, can still be short and big.
"Smaller" is used in comparisons as much as "shorter". Is the "er" that indicates the comparison not the "small".