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BIE November 2014 Atlanta Fed Survey of Business Inflation Expectations For immediate release: November 12, 2014 Contact: Jean Tate, 404-498-8035 or jean.tate@atl.frb.org The year-ahead inflation expectations of businesses were 2.0 percent in November, according to the Federal Reserve Bank of Atlanta’s most recent business inflation expectations (BIE) survey. The survey was conducted November 3–7, with 209 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 indicated that, on average, they expect unit costs to rise 2.0 percent over the next 12 months. Inflation uncertainty was unchanged at 2.4 percent. Firms also report that, compared to this time last year, their unit costs are up 1.9 percent. Respondents’ sales levels, compared to what they consider “normal” conditions, showed improvement; approximately 61 percent of respondents indicating current sales levels are at or above normal. Profit margins were virtually unchanged, with roughly 49 percent of respondents indicating their profit margins are at or above normal. Quarterly question: Factors influencing price change About 71 percent of respondents, the largest percentage to date, expect labor costs to put moderate or strong upward pressure on their prices over the next 12 months. Respondents’ expectations regarding the influence of nonlabor costs on prices decreased from the last measure, which was taken in May; 62 percent of respondents indicating upward price pressure. Forty-two percent of respondents expect sales levels to put moderate or strong upward pressure on prices in the year ahead. The majority of firms expect productivity and margin adjustments to have little or no influence over prices in the next 12 months. Special question: Year-ahead compensation growth expectations The question, previously asked in May 2013 and August 2014, assessed firms’ average compensation growth expectations (including benefits). Firms indicated that they expect average total compensation to increase by 2.9 percent over the next 12 months, on average. Please see page 3 for a breakdown of the results. 1 Monthly Questions Year-Ahead Inflation Expectations and Uncertainty (percent) 3.5 3.0 2.4 2.5 2.0 2.0 1.5 Uncertainty Year-ahead inflation expectations 1.0 0.5 0.0 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 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) 3.5 10 0 3.0 above normal below normal -10 Sales levels Profit margins 2.5 -11 1.9 2.0 1.5 -23 -20 1.0 -30 0.5 0.0 -40 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 Source: Atlanta Fed Business Inflation Expectations (BIE) Survey 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? (diffusion index, 0+ = upward influence on prices) 50 40 30 20 10 0 -10 May-12 Aug-12 Sales Levels Nov-12 Feb-13 Labor Costs May-13 Aug-13 Nov-13 Margin Adjustments Source: Atlanta Fed Business Inflation Expectations (BIE) Survey 2 Feb-14 Productivity May-14 Aug-14 Nov-14 Non-Labor Costs Special Question Distribution of Expected Percentage Change in Average Compensation per Worker (including benefits) over the next 12 months 25 mean expectation: 2.9% Frequency of response 20 15 10 5 0 -6 -5 -4 -3 -2 -1 0 1 2 3 4 Expected percentage change Source: Atlanta Fed Business Inflation Expectations (BIE) Survey 3 5 6 7 8 9 10 11 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* September 9% 32% 38% 18% 3% -14 October 11% 33% 35% 19% 2% -16 November 9% 30% 36% 23% 2% -11 How do your current PROFIT MARGINS compare with “normal” times? Much less Somewhat less About normal Somewhat greater Much greater Diffusion index* September 11% 41% 34% 13% 1% -24 October 13% 40% 32% 14% 0% -26 November 11% 40% 34% 13% 2% -23 Up moderately (3.1% to 5%) Up a lot (>5%) Mean 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%) September 2% 23% 61% 9% 4% 1.8% October 2% 24% 56% 12% 5% 1.9% November 3% 20% 59% 14% 4% 1.9% 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) September 5% 24% 43% 19% 9% 2.1% (2.5%) October 7% 25% 41% 19% 8% 1.9% (2.4%) November 7% 24% 41% 19% 9% 2.0% (2.4%) 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† May 0% 1% 34% 54% 10% 37 August 0% 0% 0% 2% 0% 1 November 1% 1% 27% 63% 8% 39 Labor Costs Non-Labor Costs May 1% 1% 24% 64% 10% 40 August 0% 0% 0% 0% 0% 0 November 1% 4% 33% 53% 9% 33 May 0% 14% 69% 15% 1% 1 August 0% 0% 0% 0% 0% 0 November 1% 16% 60% 22% 1% 4 May 0% 11% 59% 27% 2% 10 August 0% 0% 0% 0% 0% 0 November 1% 14% 58% 26% 2% 7 May 0% 11% 52% 35% 2% 13 August 0% 0% 14% 0% 0% 0 November 1% 13% 43% 39% 3% 15 Productivity Margin Adjustments Sales Levels Note: Percentages may not sum to 100 due to rounding. Also, due to a programming error in August's survey, the "factors contributing to price change" quarterly question was not asked. *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 4 are being influenced downwards on average.