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What do you expect? Surveying inflation expectations
At the National Bureau of Economic Research (NBER) summer institute in 2007, Federal Reserve Chairman Ben Bernanke challenged researchers with three questions:
- How should the central bank best monitor the public's inflation expectations?
- How do changes in various measures of inflation expectations feed through to actual pricing behavior?
- What factors affect the level of inflation expectations and the degree to which they are anchored?
A broad interpretation of this challenge implies that policymakers would benefit from a better understanding of how inflation expectations are formed and influence prices. This is a tall order, to be sure, and investigations aimed at improving this understanding are well under way.
For example, the Federal Reserve Bank of New York has an initiative to better measure and understand the inflation expectations of households. And the Federal Reserve Bank of Cleveland has developed a measure of inflation expectations derived from a model of financial data and economic forecasts. There are certainly many other examples, and it seems fair to say that the chairman's call to action has been taken up by many researchers both inside and outside of the Federal Reserve System.
Among the more obvious gaps in our knowledge of inflation expectations is the inflationary sentiment of businesses. Taking from the chairman's NBER talk:
"Information on the price expectations of businesses—who are, after all, the price setters in the first instance—as well as information on nominal wage expectations is particularly scarce.
"…[Further,] how do changes in various measures of inflation expectations feed through to actual pricing behavior?"
The Federal Reserve Bank of Atlanta has decided to take up this mantle. Today, we are unveiling our first Business Inflation Expectations survey—a monthly, online survey of the pricing environment and sentiment of the businesses in the Sixth Federal Reserve District (those in Alabama, Florida, Georgia, and parts of Louisiana, Mississippi, and Tennessee). Approximately 300 business owners and top executives receive our survey each month. This panel represents a broad cross-section of business and roughly matches the industrial composition of the U.S. economy.
Information gathered from our panel allows us to measure the inflation expectations and inflation uncertainty of businesses—as measured by their expectations for unit costs over the coming 12-month period and the uncertainty surrounding those expectations. Panelists also weigh in on current business conditions and margins as well as potential sources of price pressure in the coming year. According to the January survey just released, our panel indicated that, on average, they expect unit costs to rise 1.8 percent over the next 12 months, down just slightly from 1.9 percent in December. In other words, the unit cost increases expected by the businesses in our panel are comparable to recent year-ahead inflation forecasts of private economists.
The firms in our panel indicate that they are still operating in an environment of below-normal sales and depressed margins, although both have been slowly improving since October. Looking forward, firms anticipate labor costs will put little or only moderate upward pressure on prices in the year ahead. Expectations for nonlabor costs are similar, though 14 percent of panelists predict a strong upward influence on prices coming from materials and other nonlabor inputs. Respondents also anticipate that their sales, productivity, and margin adjustments are likely to have a very small, though positive, influence on prices in the coming year.
In addition to gauging firms' price-setting environment and year-ahead unit cost expectations, we are using the survey to investigate issues of longer-term interest for research and policy. Often we will put to our panel a special question designed for this purpose.
This month, we asked firms to tell us how frequently they make small price adjustments. The results of this inquiry were mixed, but intriguing. A significant share of firms indicated that they do not make very small price adjustments. Specifically, 35 percent responded that they don't make price adjustments of less than 1 percent. Another 14 percent indicated that very small price adjustments are rather rare (about one or two per every 20 price changes). But for a small proportion of our panel, very small price adjustments were common. Fifteen percent indicated that at least half their price changes were very small changes.
We obviously have many more questions to ask of our panel—this is only the beginning of our survey. But we think we're headed in the right direction.
If you want to learn more about our survey or be alerted when new survey data become available, go to the Atlanta Fed's Business Inflation Expectations Survey page.
Mike Bryan, vice president and senior economist,
Laurel Graefe, economic policy analysis specialist, and
Nicholas Parker, economic research analyst, all with the Atlanta Fed
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