Companies on average in the Fed's sixth district (Georgia and five other southern states) expect the annual inflation rate will ease slightly more amid slowing global economic growth and despite tight labor markets, according to the latest survey by the Federal Reserve Bank of Atlanta.

The survey showed firms forecast that year-ahead unit costs would rise 3.0 percent in January, down further from 3.1 percent in December and 3.3 percent projected from September to November. It is the lowest since 3.0 percent forecast in August 2021. The outlook has drifted down from 3.5 percent in August 2022, 3.7 percent projected in the previous three months and 3.8 percent in April and March that year, which was the highest level in the survey dating to October 2011.

As for the current economic climate, the diffusion index for sales levels"compared to normal" edged up to minus 17 in January after falling to minus 18 in December and being unchanged at minus 11 in November. It has been in negative territory for the eighth straight month.

The index for profit margins levels"compared to normal" fell to minus 25 in January after being unchanged at minus 22 in December and rising to the level in November from minus 29 in October, which was the lowest since minus 33 in August 2020. The index has been in negative territory since the start of the survey in October 2011.

The mean of year-over-year unit cost growth edged down to 3.7 percent in January from 3.8 percent in December, 4.0 percent in November and the survey high of 4.3 percent in August 2022. It is the lowest since January 2022, when it was also 3.7 percent.

On a quarterly question, firms' sales gaps (percentage below"normal" unit sales levels) significantly decreased to minus 4.6 percent in January from minus 2.1 percent in October and July and plus 1.3 percent in April. Small, medium, and large firms' unit sales gaps all slumped.

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.