US: Atlanta Fed Business Inflation Expectations

January 11, 2017 09:00 CST

Actual Previous
Bus Infl Exp % Yr/Yr 2.0% 2.1%

Inflation expectations at the business level are falling back this month after spiking in November and December. January's year-ahead gauge is down 1 tenth to a year-on-year 2.0 percent vs 2.1 percent in December. This reading spiked 3 tenths in November to 2.0 percent, lifting it to cycle highs.

January's dip is tied to a fractional downtick among those businesses that see slight to moderate gains ahead, offset by another uptick in those that see sharp gains, at 9 percent for this latter reading which is unusually high.

These results stand in direct contrast with the consumer side where expectations have been falling, not rising. Watch for Friday's consumer sentiment report and the next update on consumer inflation expectations.

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.

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.