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BIE August 2013 Atlanta Fed Survey of Business Inflation Expectations For immediate release: August 14, 2013 Contact: Jean Tate, 404-498-8035 or jean.tate@atl.frb.org The y ear-ahead inflation expectations of businesses rose to 2.0 percent in August , acco rding to the Federal Reserve Bank of Atlanta’s most recent business inflation expectations (B IE) survey. The surve y was conducted August 5 –9 with 212 firm s responding to ques tions about their business conditions, inflation outlook, and potential pricing pressures. The results are summarized below. Year-ahead inflation expectations and current conditions Respondents indicated that, on average, they expect unit costs to rise 2.0 percent over the next 12 months, roughly in line with the recent year-ahead inflation forecasts of private economists. Inflation uncertainty declined to 2.3 percent in August from 2.5 percent in July. Firms also report that, compared to this time last year, their unit costs are up 1.7 percent. Sales levels improved in August, with 53 percent of respondents now saying their current sales levels are at or above normal compared to 50 percent in July. Profit margins declined slightly from the July reading, with just 45 percent of respondents indicating their profit margins are at or above normal. Quarterly question: Factors influencing price change Sixty-five percent of respondents (the same percentage as in May, which was a series high) expect labor costs to have a moderate to strong upward influence on prices over the coming year while expectations for the influence of non-labor costs have declined continuously since last February’s measure. Eighteen percent of respondents expect productivity to put moderate to strong upward pressure on prices over the coming year while the majority of respondents expect margin adjustments to have little or no influence. Thirty-seven percent of respondents expect sales levels to put moderate to strong upward pressure on prices in the year ahead. Special question: 2015 federal funds rate projections The special question asked panel members to assign probabilities to various ranges for the federal funds rate at the end of 2015. Fifty percent of respondents indicated that they expect the fed funds rate to be between 0.5 and 1 percent, while 40 percent of respondents expected it to be greater than 1 percent but less than 1.5 percent. The remaining 10 percent of respondents expect the federal funds rate to be either less than 0.5 percent (2 percent of respondents) or greater than 1.5 percent (8 percent of respondents) at the end of 2015. Please see page 3 for a breakdown of the results. For more information and interactive charts, visit the BIE survey site at www.frbatlanta.org/research/inflationproject/bie/. Monthly Questions Year-Ahead Inflation Expectations and Uncertainty (percent) 3.5 3.0 2.3 2.5 2.0 1.5 2.0 Uncertainty 1.0 Year-ahead unit cost expectations 0.5 0.0 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Source: Atlanta Fed Business Inflation Expectations (BIE) Survey Sales Levels and Profit Margins Compared to Normal Times Year-over-Year Unit Costs (percent) (diffusion index, 0+ = greater than normal times) 5 0 -5 -10 -15 -20 -25 -30 -35 -40 -45 3.5 3.0 Sales levels Profit margins -16 2.5 1.7 2.0 1.5 -26 1.0 0.5 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Source: Atlanta Fed Business Inflation Expectations (BIE) Survey 0.0 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Source: Atlanta Fed Business Inflation Expectations (BIE) Survey Quarterly Question 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? (percentage of respondents indicating moderate to strong upward pressure) 90 80 70 60 50 40 30 20 10 0 Nov-11 Feb-12 Labor Costs May-12 Non-Labor Costs Aug-12 Nov-12 Productivity Source: Atlanta Fed Business Inflation Expectations (BIE) Survey Feb-13 Margin Adjustments May-13 Aug-13 Sales Levels Special Question Year-end 2015 Federal Funds Rate Projections percentage of responses 50% 40% 30% 20% 10% 0% less than 0.5% 0.5% to 1% greater than 1% to 1.5% greater than 1.5% 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* June 11% 32% 31% 24% 1% -14 July 13% 37% 29% 21% 0% -21 August 11% 36% 30% 20% 3% -16 How do your current PROFIT MARGINS compare with “normal” times? Much less Somewhat less About normal Somewhat greater Much greater Diffusion index* 10% 40% 36% 12% 1% -22 July 8% 46% 33% 13% 0% -24 August 10% 45% 33% 10% 2% -26 Up a lot (>5%) Mean June Looking back, how do your UNIT COSTS compare with this time last year? Down (<-1%) About unchanged (-1% to 1%) June 5% 22% 60% 12% 2% 1.7% July 5% 23% 58% 9% 5% 1.8% August 6% 25% 51% 14% 4% 1.7% Up somewhat Up moderately (3.1% to 5%) (1.1% to 3%) 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%) Mean (Variance) June 8% 28% 39% 17% 8% 1.8% (2.6%) July 7% 26% 42% 17% 8% 1.8% (2.5%) August 5% 25% 42% 20% 8% 2.0% (2.3%) 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† February 0% 1% 38% 55% 5% 33 May 0% 1% 35% 56% 9% 37 August 0% 1% 34% 57% 8% 36 February 0% 2% 21% 69% 9% 42 May 0% 1% 25% 63% 11% 42 August 0% 1% 29% 58% 12% 40 February 0% 11% 74% 13% 2% 2 Labor Costs Non-Labor Costs Productivity May 1% 16% 70% 13% 0% -2 August 0% 19% 63% 16% 2% 0 February 4% 11% 56% 30% 0% 6 May 2% 12% 58% 25% 3% 8 August 1% 11% 60% 26% 2% 8 February 2% 8% 48% 38% 3% 16 May 1% 11% 53% 33% 2% 12 August 1% 16% 46% 34% 3% 11 Margin Adjustments Sales Levels 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.