|Bus Infl Exp % Yr/Yr||1.9%||1.8%|
Inflation expectations over the next 12 months remain soft but did edge higher this month, to plus 1.9 percent vs 1.8 percent in November. Actual costs also moved higher, up 2 tenths but to a still very soft plus 1.5 percent. Though levels are low, the direction of the data are a positive for the Federal Reserve's efforts to move inflation toward 2 percent.
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.
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