Producer Prices Rise
Actual and projected producer price inflation reported by DMP respondents has continued to rise in recent months, in line with the upward trend in headline CPI inflation. DMP's annual price growth averaged 6.9% in the three months to May, compared with 5.4% in the three months to February (Figure 1). This refers to the proprietary price charged by companies across the economy, not just those selling directly to consumers. Price increases ranged widely, with 60% of companies reporting increases of more than 5% and 27% of companies reporting increases of more than 10%. Price increases were particularly high in the commodity sector compared to the service sector. Commodity price inflation was 8.5% in the three months to May, while inflation in the services sector was 5.7%. The persistent rise in inflation could be due to a variety of factors, including sharp increases in energy prices and supply and labor shortages (discussed in more detail below).
In addition to the rise in realized inflation, expected price inflation for the coming year also rose, reaching 5.9% in the three months to May, compared with 4.8% in the three months to February. As a result, the firm expects strong price inflation to continue over the next 12 months, albeit at a slightly slower pace than last year. Product price inflation is expected to be higher than service inflation next year.
Figure 1: Both actual and expected price inflation have risen further in recent months
Actual and expected annual price inflation(-exist)
- (a) The realized price growth results are based on the question: "Looking back, what is the approximate percentage change in the average price you charged from 12 months ago to the present, considering all products and services?". The expected price growth results are based on the following questions: "Looking forward, what is the approximate percentage change in average price that you would expect between now and 12 months under each of the following scenarios: lowest, low, medium, high, and highest?" and Respondents were asked to assign a probability to each scenario. In the figure, the solid line is a three-month moving average. The dotted line is one month of data.
Unit costs, wages and price growth
For the first time since before the Covid-19 pandemic, the May survey asked firms in the DMP about actual and expected growth in average unit costs and wages. Average unit costs are estimated to have increased by 8.8% over the past 12 months (Figure 2). Average unit cost is defined as the average cost required to produce a single unit of a good or service. Manufacturing and other manufacturing (including agriculture, mining and utilities) experienced the strongest unit cost growth at 14%. Over the next 12 months, companies expect unit costs to increase by an average of 7.8%. Across all companies, there is a strong positive correlation between unit cost growth and price growth, both in the past year and in the year ahead. But that ratio is less than one-to-one, meaning higher unit costs can lead to lower profit margins.
In May, real wage growth at firms over the past 12 months was 5.5% (Chart 2). It is lower than both companies' own price inflation and CPI inflation. For the next 12 months, the company expects wage growth to be slightly lower than last year's 4.8 percent and lower than expected price growth. This means that despite the current high inflation rate, businesses do not expect wage growth to accelerate further in the coming year.
Figure 2: Unit cost growth is stronger than average price growth, while wage growth is weaker than price growth
Unit Cost Growth, Cost Growth, and Wage Growth (May 2022)(-exist)
- (a) The unit cost growth results are based on the following questions: "Looking back, what is the approximate percentage change in your company's average unit cost from 12 months ago to the present?"; and "Looking forward, between now and 12 months, what is your would assign an approximate percentage change in average unit cost to each of the following: lowest, low, medium, high, highest?". Own price inflation results are based on the following questions: "Looking back, what is the approximate percentage change in the average price you charge from 12 months ago to the present, considering all products and services?"; and "Looking forward, 12 months Finally, what percentage change do you expect the average price to change in each of the following cases: minimum, minimum, average, maximum, maximum?". Salary growth results are based on the following questions: "Looking back, what is the approximate percentage change in your average salary for each job from 12 months ago to the present?"; and "Looking forward, between What is the approximate percentage change in average salary per employee for each of the following situations?". When asked about their expectations for the coming year, respondents were asked to assign a probability to each scenario. Combining the five scenarios with associated probabilities yields point estimates.
New questions were also added in May, asking panellists for the first time about expectations for official consumer price index (CPI) inflation for the next one and three years. They were also asked about current CPI inflation. On average, respondents' estimates of the current CPI inflation rate are accurate, which is in good agreement with official ONS statistics (Figure 3; note that the latest CPI figures are from 18 May during the survey period released when the CPI rose from 7% to 9%). CPI inflation for the year ahead is forecast at 6.9%, lower than current inflation but still high and above headline inflation expectations. CPI expectations for the year ahead are also widely spread across companies, ranging between 4% and 10% over 10 yearselectronicPost-90selectronicpercentiles, respectively. Finally, CPI inflation expectations for the next three years averaged 3.8%, similar to last yearData from Household Surveys.
Figure 3: Perceived CPI inflation is in line with official statistics, while expectations for the next one to three years remain high
CPI inflation expectations, own price inflation and ONS CPI inflation (May 2022)(-exist)
- (a) The CPI inflation expectations result is based on the question, 'What do you think is the current annual CPI inflation rate in the UK? What do you think the UK's annual CPI inflation rate will be in one and three years' time? . Own price inflation results based on the following question: "Looking back, what is the approximate percentage change in the average price you charge from 12 months ago to the present, considering all products and services?" ”; and “Looking forward, 12 months from now, what percentage change would you expect the average price to have changed under each of the following scenarios: minimum, minimum, average, maximum, maximum? Respondents were then asked to assign a probability to each scenario. Combining the five scenarios with the associated probabilities yielded point estimates. The ONS CPI data shown were available on the day the survey was completed. For responses submitted, we used March CPI data, and for responses submitted on or after May 18, we used April CPI data (released May 18).
The nature of the uncertainty faced by companies in the DMP has changed in recent months. Inflation and sales uncertainty can be measured using the annual expectations data from the DMP, since the survey asks about the distribution of expectations, not just point estimates. These represent the average standard deviation between the firm's expectations for price growth and sales, respectively.
Expected corporate price growth (Chart 1), accompanied by higher inflation uncertainty, is now at its highest level since the series began (Chart 4). Inflation uncertainty is generally higher for smaller firms and is associated with larger forecast errors when firms forecast their own price growth. Measures of sales uncertainty have also risen slightly in recent months and remain above pre-pandemic levels. Finally, Figure 4 presents a measure of overall uncertainty, calculated as the percentage of respondents reporting their firm's current uncertainty as "high" or "very high." The target has been more or less stable at around 50% since mid-2021, although it increased slightly in the three months to May.
DMP members also regularly receive questions about Brexit and Covid-19 as sources of uncertainty for their business. In May, both Brexit and COVID-related uncertainty were at their lowest levels since the question was asked: 20% of firms cited Brexit as a top-three source of uncertainty and 21% cited COVID as a top-three source of uncertainty source of certainty. .In addition, the company was asked whether the war between Russia and Ukraine was a source of uncertainty starting in March 2022. In May, 33% of firms listed the war as a top three source of uncertainty, up from 44% in preliminary March data (seeAnayi et al. (2022)to further analyze the impact of conflict on uncertainty).
Figure 4: Indicators of inflation, sales and general uncertainty have risen over the past three months
Inflation, Sales and Overall Uncertainty(-exist)
- (a) Data are three-month moving averages. The Sales Uncertainty Index is based on the following question: "Looking forward to the year from Q1/2/3/4 to Q1/2/3/4, by what percent do you expect your sales to grow under each of the following scenarios?" (minimum , lowest, medium, high, and highest)" and asked respondents to assign a probability to each situation. Likewise, the Inflation Uncertainty Index is constructed from the standard deviation of expected business price growth over the next 12 months. Both indices are normalized to 2019 averages before applying a three-month moving average. The overall uncertainty data is based on the following question: "How would you rate the overall uncertainty your company is currently facing?". Respondents could select one of the following options: (i) Very High - it is difficult to predict future sales, (ii) High - it is difficult to predict future sales, (iii) Medium - future sales can be Approximate forecast, (iv) Low - can accurately predict future sales, (v) Very Low - can predict future sales very accurately. A three-month moving average is then calculated.
Labor supply and shortage
After falling slightly at the start of the year, supply disruptions have increased in recent months. In May, companies estimated that 17% of their non-labor force inputs were disrupted, the highest level since November 2021. Disruption over the past three months has been particularly severe in the manufacturing, construction, residential and food sectors, with more than 20 percent of non-labor inputs disrupted on average. There is a strong positive correlation between supply disruptions and actual and projected unit cost increases, suggesting that such disruptions are a major factor driving up costs for companies.
In addition to supply disruptions, hiring issues have increased from already high levels. In May, 63% of companies said they found it "much more difficult" than usual to recruit new employees. These problems are widespread, with more than 45% of companies across all industries finding hiring "much harder" than usual in the past three months. Finally, it was reportedOctober 2021, there remains a clear positive relationship between hiring problems and realized and expected increases in production prices.
Figure 5: Delivery and recruitment issues remain prevalent
Percentage of non-labour-related inputs (left panel) and percentage of firms currently finding it “harder” to hire than usual (right panel)(-exist) (Second)
- (a) The results for non-labor input availability are based on the following question: "Has the availability of non-labor inputs used by your firm been disrupted in the past month?". Respondents indicated a percentage of impact.
- (b) Findings on difficulty in recruiting were based on the following question: “Do you think it is currently easier or more difficult to recruit new employees than usual?” Respondents could choose one of the following options: (i) Much easier, (ii) Easier, (iii) more or less normal, (iv) a bit harder, (v) much harder, (vi) not applicable - not hiring for now.
The DMP is made up of CFOs from small, medium and large UK companies from a wide range of industries.
We survey panelists to monitor developments in the UK economy and hear from the business community. This work complements our intelligenceagent.
This memo is a summary of a survey conducted with DMP members through May 2022. The May Survey was in the field from May 6-20. In May, out of 9,798 panelists, we received 2,608 responses.
fartherMonthly data from May surveyA limited number of DMP series released on June 1, 2022. Aggregate data for all survey questions is published quarterly.Survey data from November to JanuaryPublished February 3. More information is also available atDMP-Website.
The group was established by the Bank of England in August 2016 with academics from Stanford and Nottingham Universities. It is designed to represent people in the UK business community. All results are weighted by employment data. CheckBloom et al. (2017)more details.
The DMP is supported by the Economic and Social Research Council.