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BIE January 2013 Atlanta Fed Survey of Business Inflation Expectations For immediate release: January 16, 2013 Contact: Jean Tate, 404-498-8035 or jean.tate@atl.frb.org The year-ahead inflation expectations of businesses fell to 1.8 percent in January, from 1.9 percent in December, according to the Federal Reserve Bank of Atlanta’s most recent business inflation expectations (BIE) survey. The survey was conducted January 7–11 with 200 firms responding to questions about their business conditions, inflation outlook, and potential pricing pressures. The results are summarized below. Year-ahead inflation expectations and current conditions Respondents indicate that, on average, they expect unit costs to rise 1.8 percent over the next 12 months. That number is down from 1.9 percent in December but roughly in line with the recent year-ahead inflation forecasts of private economists. Inflation uncertainty also decreased slightly by 0.1 percentage point to 2.4 percent in January. Firms also report that, compared to this time last year, their unit costs are up 1.6 percent. After notable improvement in December, respondents indicate that sales levels and profit margins have declined somewhat. Quarterly question: Long-term inflation expectations Over the long term, that is, per year over the next five to 10 years, respondents expect unit costs to increase 3.1 percent, up slightly from the October reading of 2.9 percent. Respondents’ uncertainty (variance) regarding this expectation has decreased to 2.5 percent, the lowest level yet. Special question: Description of “normal” times Some BIE survey questions, including some special questions, ask respondents to compare firm characteristics (sales levels, margins, and so on) to “normal” times. Recognizing the variability of how panel members define normal times, this month we asked the open-ended question: “How would you describe the concept of ‘normal’ times for your firm?” Twenty-three percent of respondents describe normal times as a particular level of demand while 22 percent describe it as a specific rate of growth of revenue or sales. Many respondents also identify it as an environment of greater price stability or pricing power (17 percent). Some characterize normal times by a particular unemployment rate, rate of GDP growth, and/or level of consumer confidence (11 percent). Seven percent cite a predictable business environment, with the remaining 21 percent divided among several categories, each representing a small percentage of all responses. For more information and interactive charts, visit the BIE survey site at www.frbatlanta.org/research/inflationproject/bie/. Monthly Questions Year-Ahead Unit Cost Expectations and Uncertainty (percent) 3.5 3.0 2.5 2.0 1.5 1.0 Uncertainty Year-ahead unit cost expectations 0.5 0.0 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Source: Atlanta Fed Business Inflation Expectations (BIE) Survey Unit Costs Compared to This Time Last Year Sales Levels and Profit Margins Compared to Normal Times 5 0 -5 -10 -15 -20 -25 -30 -35 -40 -45 (diffusion index, 0+ = greater than normal times) (percent) 3.5 Sales levels Profit margins 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Source: Atlanta Fed Business Inflation Expectations (BIE) Survey Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Source: Atlanta Fed Business Inflation Expectations (BIE) Survey Quarterly Question Special Question How would you describe the concept of "normal" times for your firm? Long-Term Unit Cost Expectations (percent per year over the next five to 10 years) 3.5 25 (percent of responses) A level of demand 3.0 2.5 2.0 1.5 20 A growth rate of revenue, sales, etc. 15 Other (availability of credit, level of employment, average performance) An environment of price stability (stable margins/costs) 10 1.0 5 0.5 0.0 0 Apr-12 Jul-12 Oct-12 Jan-13 Source: Atlanta Fed Business Inflation Expectations (BIE) Survey Specific economic conditions (such as 3% GDP growth, low unemployment) A predictable business environment Source: Atlanta Fed Business Inflation Expectations (BIE) Survey How do your SALES LEVELS compare with sales levels during what you consider to be "normal" times? Much less Somewhat less About normal Somewhat greater Much greater Diffusion index* November 17% 42% 29% 11% 2% -30 December 14% 41% 26% 17% 2% -24 January 14% 43% 29% 14% 0% -29 How do your current PROFIT MARGINS compare with "normal" times? Much less Somewhat less About normal Somewhat greater Much greater Diffusion index* November 15% 45% 34% 6% 1% -33 December 15% 37% 37% 11% 1% -27 January 14% 45% 35% 6% 0% -34 Looking back, how do your UNIT COSTS compare with this time last year? Down (<-1%) About unchanged (-1% to 1%) Up somewhat (1.1% to 3%) Up moderately (3.1% to 5%) Up a lot (>5%) Average November 7% 23% 56% 11% 4% 1.7% December 8% 27% 53% 9% 3% 1.5% January 7% 24% 54% 11% 4% 1.6% Projecting ahead, to the best of your ability, please assign a percent likelihood to the following changes to unit costs over the next 12 months. Down (<-1%) About unchanged (-1% to 1%) Up somewhat (1.1% to 3%) Up moderately (3.1% to 5%) Up a lot (>5%) Average (Variance) November 6% 23% 41% 20% 10% 2.1% (2.6%) December 7% 26% 42% 17% 8% 1.9% (2.5%) January 6% 28% 42% 17% 7% 1.8% (2.4%) Quarterly Question: Month (and number of responses) February (89) Projecting ahead, to the best of your ability, please assign a percent likelihood to the following changes to unit costs per year over the next FIVE TO 10 years. Down (<-1%) About unchanged (-1% to 1%) Up somewhat (1.1% to 3%) Up moderately (3.1% to 5%) Up a lot (>5%) Average (variance) 4% 11% 38% 29% 17% 2.9% (2.8%) April (152) 4% 12% 36% 30% 18% 3.0% (2.6%) July (153) 4% 15% 36% 26% 19% 2.8% (2.9%) October (196) 4% 13% 36% 30% 17% 2.9% (2.7%) January (196) 3% 12% 32% 28% 23% 3.1% (2.5%) Note: Percentages may not sum to 100 due to rounding. *The diffusion index is calculated as an average response such that each response of much less is assigned a value of –100; somewhat less is assigned a value of –50; about normal, 0; somewhat greater, 50; and much greater, 100. Therefore, a positive index value implies that the indicator is greater, on average, and a negative index value implies that the indicator is lower, on average.