Output price inflation
Realised output price inflation reported by DMP respondents has flattened off in recent months. In three months to November, realised annual price growth was 7.4%, on average, down 0.3 percentage points relative to three months to August (Chart 1). These numbers refer to prices charged by businesses across the whole economy, rather than just those selling directly to consumers. In the three months to November, annual price growth was reported to have been highest in the manufacturing sector at around 11%, followed by wholesale and retail, construction, and transport and storage, which all reported inflation rates in the region of 9%.
In addition to the slowdown in realised inflation, expected year-ahead own-price inflation has also softened. In the three months to November, firms’ expected year-ahead price inflation was 6.2%, down from 6.5% in the three months to August.
Chart 1: Realised and expected annual price growth have flattened off 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.
CPI inflation expectations
Since May 2022, panel members have also been asked about their expectations for official consumer prices index (CPI) inflation, both one year and three years ahead, and 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. One year ahead CPI inflation expectations have fallen from a peak of 9.5% in September to 7.2% in November (Chart 2, Panel A). This fall in mean expected CPI inflation one year ahead has been associated with fewer businesses expecting very high rates of inflation in the distribution (Chart 2, Panel B). Expected three year ahead CPI inflation also decreased to 3.9% in November, down 0.9 percentage points from September. These downward revisions, and the earlier increases, in CPI inflation expectations could reflect news about energy costs. In particular, the policy announcements around Government support for energy costs, with detail on the Energy Bill Relief Scheme released on 21 September, are likely to have been a factor in lowering CPI expectations.
Chart 2: CPI inflation expectations remain elevated and highly dispersed among respondents
Average CPI inflation perceptions and expectations (Panel A) and distribution of year-ahead 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 density plots in Panel B are based on data from the July to November 2022 period.
Uncertainty
Data from the DMP survey can be used to construct a number of different uncertainty metrics. Measures of inflation and sales uncertainty can be calculated 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. In addition, the survey asks respondents directly about the overall level of uncertainty facing their business.
Overall uncertainty, as reported by panel members, has increased since the start of the year, but fell back a little in November. The percentage of respondents who reported that the overall level of uncertainty facing their business was high or very high was 65% in the three months to November (Chart 3), although the single month number for November was lower at 60%. That was still well above the 48% reported in the first quarter of the year. Sales uncertainty, as calculated from the distribution of expectations, has fallen a little during 2022 and is well below levels seen during the Covid pandemic, although still above its pre-pandemic level. However, uncertainty about prices has risen materially in 2022 and remains at a historically high level.
Chart 3: Overall uncertainty has fell back a little in November, 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 is 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 ‘price 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’ index 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.
The effects of higher interest rates
Starting in November 2022, new questions were introduced to the survey asking panel members about the effective interest rates on their bank and non-bank borrowing. In particular, firms were asked how the interest rates on their borrowing had changed over the past year, and their expectations of future changes. The average borrowing rate has increased by 1.3 percentage points since the end of 2021 (from 3.5% at the end of 2021 to 4.8% in November 2022, on average), and firms expect their borrowing rates to increase further, by 1 percentage point, in the year ahead.
The data on changes in interest rates faced by businesses are broadly in line with official statistics, where the effective interest rates on loans paid by corporates increased by 1.4 percentage points in the 12 months to September. Approximately one third of firms reported no change in their borrowing rate so far; indicating they may be holding fixed-rate debt (Chart 4). A broad range of changes can be observed across the distribution of firms who have seen an increase in their borrowing rates (Chart 4).
Chart 4: The average effective interest rates on all borrowing have increased
Change in borrowing rates from 2021 to 2022 (aqua bars) and change in borrowing rates from 2021 to 2023 (orange bars) (a)
Footnotes
- (a) The results on borrowing rates are based on the question: ‘What is the approximate average annualised interest rate on the interest-bearing borrowing that your business has, both now and at the end of 2021? And what do you expect the average interest rate to be a year from now?’. The bars refer to the percentage change in borrowing rates.
Businesses were also asked about the expected impact of changes in interest rates – including rate changes to date and expected future changes – on their capital expenditure and employment in the year ahead. On average, businesses estimated that their investment will be 8.4% lower over the next year, relative to what would have otherwise happened (Chart 5, Panel B). Thirty-three per cent of panel members expect lower capital expenditure because of higher interest rates. Similarly, firms suggested that the number of people they employ would be 2.3% lower in the year ahead, with 29% of respondents expecting lower employment as a consequence of changes in interest rates (Chart 5, Panel A). This is likely to include both the effects of rate rises to date and the effects of expected increases over the next year.
Chart 5: On average, businesses estimated that their investment and employment will be lower over the next year as a result of higher interest rates
Expectations on the impact of higher interest rates across businesses (Panel A) and average impact of higher interest rates on employment and capital expenditures (Panel B) (a)
Footnotes
- (a) The results on employment are based on the question: ‘Holding other factors constant, how do you expect changes in interest rates to affect the number of employees that your business has over the next year?’. The results on capital expenditure are based on the question: ‘Holding other factors constant, how do you expect changes in interest rates to affect the capital expenditure of your business over the next year?’.
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 November 2022. The November survey was in the field between 4 and 18 November. In November we received 2,601 responses.
Further monthly data from the November survey for a limited number of DMP series was published on 1 December 2022. Aggregate level data for all survey questions are published on a quarterly basis. Data from the August to October surveys were released on 3 November. 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.