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October 2012 For immediate release: October 26, 2012 Contact: Jean Tate, 404-498-8035 or jean.tate@atl.frb.org The inflation expectations of businesses in the Southeast for the coming year was 1.8 percent in October, up from 1.7 percent in September, according to the Federal Reserve Bank of Atlanta’s most recent business inflation expectations (BIE) survey. The survey was conducted October 15–19 with 196 firms responding to questions about their business conditions, inflation outlook, and potential pricing pressures. The results are summarized below. EXPECTED CHANGE IN UNIT COSTS Respondents indicated that, on average, they expect unit costs to rise 1.8 percent over the next 12 months. That number is up slightly from 1.7 percent in September and is somewhat below recent year-ahead inflation forecasts of private economists. Inflation uncertainty declined by 0.1 percentage point to 2.5 percent in October, its second consecutive monthly decline. Firms also reported that, compared to this time last year, their unit costs were up 1.4 percent. That falls from 1.7% in September below respondents' October 2011 year-ahead expectation of 1.9 percent. 1.8% FACTORS INFLUENCING PRICE CHANGES After some improvement in sales levels and margins last month, both factors deteriorated in October. Projecting ahead, firms continue to anticipate little or moderate upward pressure coming from input costs over the next 12 months. Businesses' expectations for the price influence from both labor and nonlabor costs over the next year held steady in October. Respondents also anticipate that margin adjustments and sales levels are likely to have a small upward influence on prices over the coming year. SPECIAL QUESTION Each quarter, the Atlanta Fed asks businesses a special question aimed at measuring firms' inflation expectations and inflation uncertainty over the longer term. This month, respondents projected unit costs to rise by 2.9 percent per year over the next five to 10 years. Firms' uncertainty about the future path of inflation was 2.7 percent (measured by the average respondent's variance). That figure roughly mirrors the uncertainty (variance) in the distribution of firms' year-ahead inflation predictions. 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* August 17% 38% 31% 13% 2% -28 September 12% 38% 35% 15% 1% -23 October 15% 45% 27% 12% 1% -30 How do your current PROFIT MARGINS compare with "normal" times? Much less Somewhat less About normal Somewhat greater Much greater Diffusion Index* August 17% 42% 31% 10% 0% -33 September 13% 41% 34% 11% 1% -28 October 19% 42% 31% 8% 1% -35 Up a lot (>5%) Average 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%) August 5% 26% 57% 8% 5% 1.6% September 10% 29% 50% 10% 2% 1.3% October 8% 29% 53% 7% 4% 1.4% Projecting ahead over the next 12 months, how do you think the following five common influences will affect the prices of your products and/or services? Strong downward influence Moderate downward influence Little/no influence Moderate upward influence Strong upward influence Diffusion Index† Labor Costs August 2% 0% 40% 54% 4% 29 September 0% 2% 42% 50% 6% 29 October 0% 2% 39% 56% 2% 29 Non-Labor Costs August 0% 2% 26% 58% 14% 42 September 0% 2% 24% 60% 14% 43 October 1% 1% 23% 61% 14% 43 August 0% 19% 64% 16% 1% -1 September 1% 18% 65% 15% 1% -1 October 0% 16% 67% 15% 1% 0 August 2% 15% 55% 26% 1% 5 September 2% 13% 57% 28% 0% 6 October 1% 16% 56% 26% 1% 5 August 4% 21% 42% 29% 4% 5 September 1% 21% 43% 34% 2% 8 October 2% 17% 46% 32% 3% 8 Productivity Margin Adjustments Sales Levels 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 Up Up unchanged somewhat moderately (-1% to 1%) (1.1% to 3%) (3.1% to 5%) Up a lot (>5%) Average Median Mode Variance August 8% 27% 38% 18% 9% 1.9% 1.8% 1.8% 2.8% September 8% 29% 40% 16% 7% 1.7% 1.7% 1.6% 2.6% October 6% 29% 40% 16% 8% 1.8% 1.8% 1.7% 2.5% Special Question: 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. Month (and number of responses) Unit costs down (<-1%) Unit costs about unchanged (-1% to 1%) Unit costs up somewhat (1.1% to 3%) Unit costs up significantly (3.1% to 5%) Unit costs up very significantly (>5%) Average Median Mode Variance February (89) 4% 11% 38% 29% 17% 2.9% 2.9% 2.9% 2.8% April (152) 4% 12% 36% 30% 18% 3.0% 3.0% 2.9% 2.6% July (153) 4% 15% 36% 26% 19% 2.8% 2.9% 3.0% 2.9% October (196) 4% 13% 36% 30% 17% 2.9% 2.9% 2.9% 2.7% 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. †The diffusion index is calculated such that each response of strong downward influence is assigned a value of –100, moderate downward influence is assigned a value of –50, little/no influence 0, moderate upward influence 50, and strong upward influence 100. Therefore, a positive index value indicates that overall prices are being influenced upwards, on average, and a negative index value indicates that prices are being influenced downwards, on average.