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MNI INTERVIEW: Firms' Price Expectations May Be 'Unanchoring'

More firms now expect inflation to exceed 5% over the longer run than any other outcome, according to the Atlanta Fed's latest business inflation expectations survey, a "worrisome" development in a high inflation environment, bank economist Brent Meyer told MNI.

The quarterly survey question asks businesses to assign a percent likelihood to their unit costs rising less than 1%, between 1% and 3%, between 3% and 5%, and more than 5% over the next five to 10 years. In June, 31% of firms surveyed marked "more than 5%," up from 24% in March and just 13% in December 2020.

"The distribution has shifted up markedly and the modal bin is now on expected outcomes of greater than 5%. That’s worrisome," Meyer said. "The Business Inflation Expectations Survey has only been around for a little over a decade and this is the first true 'inflation shock' that we’ve seen, but I’m left wondering whether or not this is was unanchoring looks like."

Average probabilities that firms assign to different inflation outcomes over 5-10 years has shifted to the rightSource: Atlanta Fed Business Inflation Expectations Survey

PROXY FOR INFLATION

Firms’ one-year-ahead inflation expectations have already roughly doubled since the start of the Covid-19 pandemic, Meyer said.

The Atlanta Fed survey asks businesses in the Fed district about their realized and expected unit costs as a proxy for inflation expectations. Unit cost realizations data yields useful insight because they are highly correlated with official overall inflation as measured by the GDP deflator, Meyer noted.

Businesses' expectations for unit cost growth is highly correlated with official inflation Source: Atlanta Fed

MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com

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