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February 2012 For immediate release: February 22, 2012 Contact: Jean Tate, 404-498-8035 or jean.tate@atl.frb.org In the Federal Reserve Bank of Atlanta’s monthly business inflation survey of firms in the Sixth Federal 19 Reserve District District, respondents indicated their inflation expectations for the coming year are 1.9 percent. That number, which is measured by the rise firms anticipate in their year-ahead unit costs, is up from 1.8 percent in January. The survey was conducted February 13–17 with 168 firms responding to questions about their business conditions, inflation outlook, and potential pricing pressures. The results are summarized below. EXPECTED CHANGE IN UNIT COSTS Survey respondents indicated that, on average, they expect unit costs to rise 1.9 percent over the next 12 months. That number is up from 1.8 percent in January and comparable to recent year-ahead inflation forecasts of private economists. Firms also reported that their unit costs had risen 1.8 percent compared to this time last yyear,, which is 0.3 p percentage g p point higher g than their assessment in January. from 1.8% in January 1.9% FACTORS INFLUENCING PRICE CHANGES According to the businesses surveyed, firms are still operating in an environment of below normal sales and depressed margins. Looking forward, firms anticipate labor costs will put little or only moderate upward p p pressure on p prices in the yyear ahead. Expectations p for non-labor costs rose in February, y, with 74 percent of panelists predicting a moderate or strong upward influence on prices coming from materials and other non-labor inputs. Respondents also anticipate that their sales, margin adjustments, and productivity are likely to have a small, though positive, influence on prices in the coming year. SPECIAL QUESTION Thi month This th the th Atl Atlanta t F Fed d asked k db businesses i a special i l question ti aimed i d att measuring i g fi firms'' iinflation fl ti expectations and inflation uncertainty over the longer term. On average, survey respondents project 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 2.8 percent (measured by calculating a variance for each respondent, then taking the average among all respondents). That figure matches the uncertainty in the distribution of firms' year-ahead inflation predictions (variance). 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* December 21% 39% 22% 16% 2% -31 January 18% 38% 28% 16% 1% -27 February 18% 37% 31% 14% 1% -28 How do your current PROFIT MARGINS compare with "normal" times? Much less Somewhat less About normal Somewhat greater Much greater Diffusion Index* December 21% 42% 25% 11% 1% -36 January 20% 36% 34% 10% 0% -34 February 17% 44% 32% 8% 0% -35 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 December 8% 25% 41% 18% 7% 1.8% January 9% 27% 47% 14% 3% 1.5% February 7% 21% 52% 16% 4% 1.8% 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† December 0% 5% 45% 47% 3% 24 January 0% 5% 41% 51% 3% 26 February 0% 1% 48% 49% 2% 26 December 2% 5% 27% 52% 14% 36 January 1% 4% 30% 51% 14% 36 February 0% 2% 24% 62% 12% 42 December 0% 14% 70% 16% 1% 1 January 1% 15% 62% 22% 0% 3 February 0% 15% 67% 18% 1% 2 December 1% 14% 61% 22% 2% 5 January 2% 12% 66% 20% 1% 3 February 0% 17% 56% 27% 0% 5 December 1% 22% 44% 29% 4% 6 January 4% 13% 45% 34% 3% 9 February 2% 18% 45% 32% 4% 9 Labor Costs Non-Labor Costs 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%) Up About Up unchanged somewhat moderately (-1% to 1%) (1.1% to 3%) (3.1% to 5%) Up a lot (>5%) Average Median Mode Variance December 9% 28% 35% 18% 10% 1.9% 1.8% 1.7% 2.8 January 6% 31% 37% 18% 8% 1.8% 1.8% 1.8% 2.6 February 7% 29% 38% 16% 10% 1.9% 1.8% 1.8% 2.8 Special Projecting ahead, to the best of your ability, please assign a percent likelihood to the following Question: changes to unit costs per year over the next FIVE TO 10 years. Number of responses‡ 89 Down (<-1%) 4% Up About Up unchanged somewhat moderately (-1% to 1%) (1.1% to 3%) (3.1% to 5%) 11% 38% 29% Up a lot (>5%) Average Median Mode Variance 17% 2.9% 2.9% 2.9% 2.8 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. ‡Responses to the special question are limited to those that were submitted after 5:30 p.m. Monday, February 13, due to a variation in the question text.