US: Atlanta Fed Business Inflation Expectations

Wed Apr 15 09:00:00 CDT 2015

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

The Atlanta Federal Reserve Bank's monthly survey released Wednesday indicated that the inflation outlook for businesses in the sixth Fed district over the next 12 months has held steady since the start of the year, as lower oil prices allow firms to improve their margins, but not reduce prices.

Respondents to the April survey projected unit costs to increase by 1.7 percent, unchanged from the March Business Inflation Expectations survey, and matching the January and February surveys.

The April survey showed firms' sales levels remained steady, while their profit margins "were virtually unchanged" when compared with February.

The Atlanta Fed survey said businesses' inflation uncertainty was 2.3 percent this month, down slightly from 2.4% in March. Firms reported their unit costs have risen by 1.5 percent compared to a year ago, the same as in February and March.

The Atlanta Fed said firms surveyed about their sales levels - compared to what they consider "normal" - remained steady, with 63% of respondents indicating that current sales levels are at or above normal.

Profit margins were at or above normal levels for 55 percent of the firms responding, up only slightly from the roughly 54 percent expressing the same sentiment a year ago.

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.