US: Atlanta Fed Business Inflation Expectations

Fri Feb 20 09:00:00 CST 2015

Actual Previous
Bus Infl Exp % Yr/Yr 1.7% 1.7%

The year-ahead inflation expectations of businesses were 1.7 percent in February, according to the Federal Reserve Bank of Atlanta's most recent business inflation expectations (BIE) survey. The survey was conducted February 913, with 208 firms responding to questions about their business conditions, inflation outlook, and potential pricing pressures.

Respondents indicated that, on average, they expect unit costs to rise 1.7 percent over the next 12 months. Inflation uncertainty was unchanged at 2.3 percent. Firms also report that, compared to this time last year, their unit costs are up 1.5 percent. Respondents' sales levels, compared to what they consider normal conditions, remained steady, with approximately 64 percent of respondents indicating current sales levels are at or above normal. Profit margins also remained steady, with roughly 54 percent of respondents indicating their profit margins are at or above normal.

Today's Atlanta Fed report is favorable for profits. Costs remain low and sales are at or above normal. The low inflation expectations figure is in line with Fed doves keeping policy rates low.

The Atlanta Fed's Business Inflation Expectations survey provides a monthly measure of year-ahead inflation expectations and inflation uncertainty from the perspective of firms. The survey also provides a monthly gauge of firms' current sales, profit margins, and unit cost changes.

On a quarterly basis, the survey also provides estimates of firms' long-term inflation expectations (per year, over the next five to 10 years), factors influencing price changes, and average percentage above/below normal sales levels.

The survey also poses a monthly special question to firms. These questions typically explore elements of firms' pricing decisions, the sensitivity of their prices to cost increases, and other aspects of the pricing environment.

The inflation expectations of firms are a critical component of the inflation outlook and provide guidance on the potential path of inflation. If firms expect that prices will increase at a given rate, their purchasing, pricing, and/or wage decisions will reflect this expectation, making the increase more likely to be realized.

Also important is the risk that firms attach to their inflation expectations. The methods the Atlanta Fed uses to compute firms' inflation expectations provide a direct measure of the subjective probabilities that firms assign to various inflation outcomes.

The FOMC judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Accurately gauging inflation expectations and uncertainties regarding these expectations are a key component of achieving this 2 percent target.

Other measures of inflation expectations are gleaned from consumer opinions, financial market instruments, and select industry groups (such as professional forecasters and purchasing managers), but there are no alternative measures of firms' inflation expectations.

When business expectations for inflation deviate from the FOMC's 2 percent target for inflation over the medium term (higher or lower than target), or when uncertainty about inflation runs higher than normal, it could be an early signal that the Federal Reserve is at risk of missing its price stability mandate. The inflation mandate is balanced against a goal of sustainable long-term employment growth.