Output price inflation
Realised and expected output price growth reported by DMP respondents have continued to increase. In the three months to August, realised annual price growth was 7.7%, on average, up from 6.9% compared with the three months to May (Chart 1). This refers to prices charged by businesses across the whole economy, rather than just by those businesses that sell directly to consumers. Price growth has been broad-based, with 66% of firms reporting increases above 5%, and 30% of firms reporting increases above 10%. Price growth has been particularly high in the goods sector relative to services. In the three months to August, annual goods price inflation was 9.1%, compared with 6.6% for the services sector. The continuing rise in reported inflation within the DMP data likely reflects multiple factors including significantly higher energy prices as well as supply and labour shortages (see Bunn et al (2022) for further details).
In addition to increases in realised inflation, expected year-ahead price inflation has also increased, reaching 6.5% in the three months to August, up from 5.9% in the three months to May. Thus, firms expect strong price growth in the following 12 months, although slightly less than over the past year.
Chart 1: Realised and expected annual price growth have increased further in recent months
Realised and expected annual price inflation (a)
Footnotes
- (a) Realised price growth results are based on the question ‘Looking back, from 12 months ago to now, what was the approximate % change in the average price you charge, considering all products and services?’. Expected price growth results are based on the question: ‘Looking ahead, from now to 12 months from now, what approximate % change in your average price would you expect in each of the following scenarios: lowest, low, middle, high and highest?’ and respondents were asked to assign a probability to each scenario. In the figure, solid lines are three-month moving averages. Dashed lines are single month data.
Unit cost, wage and price growth
Increases in costs are one factor likely to have been pushing up inflation. Starting in May 2022, businesses in the DMP have been asked about their realised and expected average unit cost growth as well as their realised and expected growth in average wage per employee for the first time since before the Covid pandemic. In August, average unit costs were estimated to have increased by 9.8% over the past 12 months, an increase from 8.8% in the May survey (Chart 2). The accommodation & food and manufacturing sectors have experienced the strongest annual growth in unit costs over the past three months, at 14% and 13%, respectively. Expected unit cost growth over the next 12 months was slightly lower, at 8.3%, in the August survey. Unit cost growth has been, and is expected to remain, higher than firms’ own price inflation, suggesting profit margins will be lower on average across firms.
In August, firms’ realised wage growth over the past 12 months was 6.4%, an increase from 5.5% in May (Chart 2). Wage growth is currently lower than both firms’ own price inflation and CPI inflation rates. The accommodation & food and transport & storage sectors reported the strongest annual wage growth in the last three months, at around 9.1% and 7.9%, respectively. Over the next 12 months, firms expect wage growth to be slightly lower than over the past year, at 5.5%. That implies firms do not expect the current high rates of inflation to lead to a further acceleration in wage growth over the next year.
Chart 2: Unit cost growth has increased and been stronger than both average price growth and wage growth
Unit cost growth, own price growth and wage growth (a)
Footnotes
- (a) The results on unit cost growth are based on the questions ‘Looking back, from 12 months ago to now, what has been the approximate % change in the average unit costs of your business?’ and ‘Looking ahead, from now to 12 months from now, what approximate % change in your average unit costs would you assign to each of the following scenarios: lowest, low, middle, high, highest?’. The results on own price inflation are based on the questions ‘Looking back, from 12 months ago to now, what was the approximate % change in the average price you charge, considering all products and services?’ and ‘Looking ahead, 12 months from now, what approximate % change in your average price would you expect in each of the following scenarios: lowest, low, middle, high, highest?’. The results on wage growth are based on the questions ‘Looking back, from 12 months ago to now, what was the approximate % change in your average wage per employee?’ and ‘Looking ahead, from now to 12 months from now, what approximate % change in your average wage per employee would you assign to each of the following scenarios?’. For the questions on year-ahead expectations, respondents were then asked to assign a probability to each scenario. A point estimate is constructed by combining the five scenarios with the probabilities attached to them.
Inflation expectations
As well as asking about their own prices, the DMP survey has recently started asking panel members about their expectations for official consumer prices index (CPI) inflation one year and three years ahead. They were also asked about the current rate of CPI inflation. On average, respondents were accurate in their estimates of current CPI inflation rates, matching the official ONS statistics (Chart 3, Panel A). In August, average CPI perceptions were 9.6%, while the official CPI inflation rate increased from 9.4% to 10.1% on 17 August (during the survey window).
CPI inflation expectations in the year ahead remained elevated, at 8.4% in August, and above expectations for own price inflation. One year ahead CPI expectations are also highly dispersed across firms in the three months to August (Chart 3, Panel B). Finally, CPI inflation expectations three years ahead have been broadly stable over the past three months. In August, the mean was 4.2%, higher than the current inflation target, but similar to recent household survey data. The median expectation for CPI inflation three years ahead remained at 3% with a narrower distribution than for one year ahead expectations (Chart 3, Panel B).
Chart 3: CPI inflation expectations remain elevated and highly dispersed among respondents
Average CPI inflation perceptions and expectations (Panel A) and distribution of CPI inflation expectations (Panel B) (a)
Footnotes
- (a) The results on CPI inflation perceptions and expectations are based on the question ‘As a percentage, what do you think is the current annual CPI inflation rate in the UK? And, what do you think the annual CPI inflation rate will be in the UK, both one year from now and three years from now?’. The kernel density plots in Panel B are based on data from the June to August 2022 period.
Working arrangements
The share of employees working from home has stabilised over recent months at around 20%. In August, 21% of hours were estimated to have been worked from home, 76% of employees worked on business premises, and 3% were unable to work (due to sickness, self-isolation, childcare, etc). The share of employees currently working from home is about three times more than 2019 levels, although well below its peak in the height of the pandemic (see Anayi et al (2021) for more details). Furthermore, there is a negative and statistically significant correlation between the share of employees working from home and realised wage growth over the past 12 months (Chart 4). The slope suggests there is around a 1 percentage point difference in average wage growth between firms who are fully remote and those who are fully working on premises. This relationship is consistent with Barrero et al (2022), who show that the shift to remote work in the US has help to lessen wage growth pressures across firms.
Chart 4: Working from home is negatively correlated with realised wage growth
Percentage of employees working from home and realised wage growth (a)
Footnotes
- (a) The results are based on the question ‘Approximately what percentage of your employees do you expect to fall into the following categories in each of the following periods?’. Respondents could assign their employees to the following categories: (i) Unable to work (eg due to sickness, self-isolation, childcare etc), (ii) Continuing to work on business premises, and (iii) Continuing to work from home. Firms are asked to include only employees of UK-based businesses and not from any overseas part of the group, and to treat employees working some hours as continuing to work if they have been partially furloughed. Where employees spend some time working on businesses premises and some time working from home, firms are asked to answer based on the approximate proportion of hours worked from each location. The results on wage growth are based on the question ‘Looking back, from 12 months ago to now, what was the approximate % change in your average wage per employee?’. The figure presents a binned scatterplot with equal-sized bins, using the data from the June to August 2022 period.
Uncertainty
The nature of uncertainty facing firms in the DMP has evolved over the past months. Measures of inflation and sales uncertainty can be constructed using year-ahead expectations data in the DMP, since the survey asks about the distribution of expectations, not just for point estimates. These represent the average standard deviations across firms of expectations for price growth and sales, respectively.
Inflation uncertainty has been stable over the past three months, although it remains at the highest level since the series began (Chart 5). Inflation uncertainty is generally higher for smaller firms and is associated with larger forecast errors by firms in predicting their own price growth (see Bunn et al (2022) for further details). The measure of sales uncertainty has decreased slightly in recent months, but still remains above pre-pandemic levels. Similar measures of uncertainty around expectations for year-ahead wage growth and unit cost growth are also very high relative to pre-pandemic levels.
Finally, Chart 5 presents a measure of overall uncertainty, calculated as the percentage of respondents reporting current uncertainty for their business as ‘high’ or ‘very high’. In the three months to August, this measure increased to 61%, up from 51% in the three months to May.
Chart 5: Overall uncertainty has increased further in recent months, while price uncertainty remains stable but elevated
Inflation, sales and overall uncertainty (a)
Footnotes
- (a) Data are three-month moving averages. The Sales uncertainty index are based on the question ‘Looking a year ahead from the first/second/third/fourth quarter to the first/second/third/fourth quarter, by what % amount do you expect your sales revenue to have changed in each of the following scenarios? (lowest, low, middle, high and highest)’ and respondents were asked to assign a probability to each scenario. Similarly, the inflation uncertainty index is constructed using the standard deviations of expected firm-level price growth over the next 12 months. Both indices are normalised by their average values in 2019, before three-month moving averages are applied. The overall uncertainty data is based on the question ‘How would you rate the overall uncertainty facing your business at the moment?’. Respondents could select one of the following options: (i) Very high – very hard to forecast future sales, (ii) High – hard to forecast future sales, (iii) Medium – future sales can be approximately forecasted, (iv) Low – future sales can be accurately forecasted, (v) Very low – future sales can be very accurately forecasted. A three-month moving average is then calculated.
Methodology
The DMP consists of the Chief Financial Officers of small, medium and large UK businesses operating in a broad range of industries.
We survey panel members to monitor developments in the UK economy and to track businesses’ views on them. This work complements the intelligence gathered by our Agents.
This note is a summary of surveys conducted with DMP members up to August 2022. The August survey was in the field between 5 and 19 August. In August, there were 10,124 panel members and we received 2,561 responses.
Further monthly data from the August survey for a limited number of DMP series was published on 1 September 2022. Aggregate level data for all survey questions are published on a quarterly basis. Data from the May to July surveys were released on 1 September. More information can also be found on the DMP website.
The panel was set up in August 2016 by the Bank of England with academics from Stanford University and the University of Nottingham. It was designed to be representative of the population of UK businesses. All results are weighted using employment data. See Bloom et al (2017) for more details.
The DMP receives funding from the Economic and Social Research Council.