Business Inflation Expectations Drop to 2.5%

Recently, the Federal Reserve Bank of New York published its monthly survey of consumer inflation expectations, which declined in July 2023 to a median 3.5% for the one-year horizon, down from 3.8% in June.

The Federal Reserve Bank of Atlanta has a similar series of surveys, only of businesses, rather than consumers, and on one level, they seem far more optimistic. On another, less and confusingly so, as these quotes from the current survey show:

• Firms’ year-ahead inflation expectations significantly decreased to 2.5 percent, on average.
• Sales levels “compared to normal” increased. However, firms’ profit margins “compared to normal” decreased. Year-over-year unit cost growth remained relatively unchanged at 3.3 percent, on average.
• Approximately 78 percent of firms expect both labor and nonlabor costs to place upward influence on prices. About 50 percent of firms expect sales levels to exert little or no influence on prices over the next 12 months. Approximately 53 percent of firms expect margin adjustment to have little or no influence on prices over the next 12 months.

One caveat is the makeup of the panels, with 300 people who “represent businesses of various sizes headquartered within the Sixth District, which encompasses Alabama, Florida, Georgia, and sections of Louisiana, Mississippi, and Tennessee.” Respondents include “executives of large corporations to owner-operators of small businesses,” with the “industry composition of the panel roughly reflects the makeup of the national economy.” While useful, the views will be, to some degree at least, regional and not national.

Regional or not, the mix of answers is puzzling and not internally consistent, as was true of the consumer polling. Consumers expected slowing inflation, but with the largest cohort expecting 4% or higher in a year and 48% thinking their household financial situation would be better in a year, even as median expected income growth of 3.2% wouldn’t keep up with expected inflation and growth in household spending would be 5.4%.

The businesses also exhibited conflicting views. Inflation would decrease to 2.5% and 78% of firms thought costs would push upward on prices, which makes sense because with inflation, everything gets more expensive, including corporate operational costs. Sales levels increased but profit margins decreased. Currently, year-over-year cost growth is 3.3%, so how realistic is it to assume that inflation would be only 2.5%?

Margins are down, and many firms didn’t expect margin adjustments to have much effect on pricing, suggesting that many will either only edge up margins or possibly accept lower ones to keep sales going.

All this only raises more questions of what will happen in business, which always brings with it the acknowledgement that whatever affects business will also affect the commercial real estate industry.