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January 2012 For immediate release: January 27, 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 Reserve District, respondents indicated their inflation expectations for the coming year are 1.8 percent. That number, which is measured by the rise firms anticipate in their year-ahead unit costs, is down slightly from December. The survey was conducted January 16–20 with 170 firms responding to questions about their business conditions, inflation outlook, and potential pricing pressures. The results are summarized below. EXPECTED CHANGE IN UNIT COSTS 1.8% Survey respondents indicated that, on average, they expect unit costs to rise 1.8 percent over the next 12 months. That number is down slightly from 1.9 percent in December and comparable to recent year-ahead inflation forecasts of private economists. Firms also reported that their unit costs had risen 1.5 percent compared to this time last year. from 1.9% in December FACTORS INFLUENCING PRICE CHANGES According to the businesses surveyed, firms are still operating in an environment of below normal sales and depressed margins, although both have been slowly improving since October. Looking forward, firms anticipate labor costs will put little or only moderate upward pressure on prices in the year ahead. Expectations for non-labor costs are similar, though 14 percent of panelists predict a strong upward influence on prices coming from materials and other non-labor inputs. Respondents also anticipate that their sales, productivity, and margin adjustments are likely to have a very small, though positive, influence on prices in the coming year. SPECIAL QUESTION This month the Atlanta Fed asked businesses a special question to gauge how frequently firms make small adjustments to their prices. The results were mixed. A significant share of firms indicated that they do not make very small price adjustments. Specifically, 35 percent responded that they don’t make price adjustments of less than 1 percent (zero out of every 20 adjustments). Another 14 percent indicated that very small price adjustments are rather rare (either one or two of every 20 price changes). However, for a small number of businesses, very small price adjustments were common. Fifteen percent indicated that at least half their price changes were very small. Question 1: 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 26% 32% 25% 15% 2% -32 December 21% 39% 22% 16% 2% -31 January 18% 38% 28% 16% 1% -27 Question 2: How do your current PROFIT MARGINS compare with “normal” times? Much less Somewhat less About normal Somewhat greater Much greater Diffusion Index* November 24% 41% 24% 11% 0% -39 December 21% 42% 25% 11% 1% -36 January 20% 36% 34% 10% 0% -34 Question 3: Looking back, how do your UNIT COSTS compare with this time last year? Down (<‐1%) About un‐ changed (‐1% to 1%) Up somewhat (1.1% to 3%) Up moder‐ ately (3.1% to 5%) Up a lot (>5%) Average November 8% 19% 55% 12% 5% 1.7 December 8% 25% 41% 18% 7% 1.8 January 9% 27% 47% 14% 3% 1.5 Question 4: 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. Up some‐ Up moder‐ what ately (1.1% to (3.1% to 3%) 5%) Down (<‐1%) About un‐ changed (‐1% to 1%) November 7% 24% 39% December 9% 28% January 6% 31% Up a lot (>5%) Average Median Mode Variance 22% 8% 2.0 2.0 1.9 2.6 35% 18% 10% 1.9 1.8 1.7 2.8 37% 18% 8% 1.8 1.8 1.8 2.6 Note: Percentages may not add up to 100 percent because of 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. Question 5: 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 down‐ Little/no influ‐ Moderate up‐ Strong upward ward influence ence ward influence influence Diffusion Index** Labor Costs November 0% 3% 41% 51% 5% 29 December 0% 5% 45% 47% 3% 24 January 0% 5% 41% 51% 3% 26 November 0% 2% 30% 52% 15% 40 December 2% 5% 27% 52% 14% 36 January 1% 4% 30% 51% 14% 36 Non‐Labor Costs Productivity November 1% 16% 69% 13% 1% -1 December 0% 14% 70% 16% 1% 1 January 1% 15% 62% 22% 0% 3 Margin Adjustments November 3% 19% 63% 16% 0% -4 December 1% 14% 61% 22% 2% 5 January 2% 12% 66% 20% 1% 3 November 3% 18% 47% 31% 1% 5 December 1% 22% 44% 29% 4% 6 January 4% 13% 45% 34% 3% 9 Sales Levels Special Question: Out of every 20 price changes you make, roughly how many are adjustments of less than 1 percent? Number of responses 0 1—2 3—5 6—10 11—15 16—20 N/A 161 35% 14% 13% 15% 6% 9% 9% **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. Note: Percentages may not add up to 100 percent because of rounding. Full historical survey results dating from October 2011 will be posted January 27 with the launch of the BIE website.