Latest results from the Decision Maker Panel survey - 2023 Q1

The Decision Maker Panel (DMP) is a survey of Chief Financial Officers from small, medium and large UK businesses. We use it to monitor developments in the economy and to track businesses’ views. This is a summary of results up until February 2023.

Price growth

Realised annual price growth has edged up while expected annual price growth has been declining in recent months.

Inflation expectations

CPI inflation expectations has been softening but remains highly dispersed among respondents.

Unit costs

Realised and expected unit cost growth pressures continued to soften.

Published on 23 March 2023

Output price inflation

Over the past few months, realised output price growth reported by DMP respondents continued to increase. The three-month moving average was 8.1% in the three months to February, up 0.6 percentage points relative to the three months to November (Chart 1, Panel A). These numbers refer to prices charged by businesses across the whole economy, rather than just those selling directly to consumers. Price growth is uneven across sectors, as Other Production (which includes agriculture, mining and utilities) and Manufacturing sectors reported higher numbers than other sectors, while Recreational Services reported the lowest. In the three months to February, annual price growth in Other Production and Manufacturing sectors were both 11%, while Recreational Services was 4%.

As opposed to the increase in realised inflation, expected year-ahead own-price inflation has softened. In the three months to February, firms’ expected year-ahead price inflation to be 5.6%, down from 6.2% in the three months to November. Despite increasing realised inflation, firms expect price growth to ease in the year ahead. The gap between realised and expected year-ahead continues to widen and now implies that firms expect their own-price inflation to fall by around 2.5 percentage points over the next year. In recent months, parallel to the fall in expected year-ahead own-price inflation one year ahead, the distribution of businesses’ year-ahead own-price growth expectations has shifted leftward (Chart 1, Panel B).

Chart 1: Realised annual price growth has edged up while expected annual price growth has been declining in recent months

Realised and expected annual price inflation and distribution of year-ahead own-price growth expectations (a)

Over the past few months, realised output price growth reported by DMP respondents continued to increase. As opposed to the increase in realised inflation, expected year-ahead own-price inflation has softened. Parallel to the fall in expected own-price inflation one year ahead, the distribution of businesses’ year-ahead own-price growth expectations has shifted leftward.Over the past few months, realised output price growth reported by DMP respondents continued to increase. As opposed to the increase in realised inflation, expected year-ahead own-price inflation has softened. Parallel to the fall in expected own-price inflation one year ahead, the distribution of businesses’ year-ahead own-price growth expectations has shifted leftward.
  • (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. The density plots in Panel B are based on data from the September 2022 to February 2023 period.

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 have been 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 5.9% in February (Chart 2, Panel A). Expected three years ahead CPI inflation also decreased to 3.4% in February, down 1.4 percentage points from September.

Chart 2: CPI inflation expectations has been softening

Average CPI inflation perceptions and expectations (a)

One year ahead CPI inflation expectations have fallen from a peak of 9.5% in September to 5.9% in February. Expected three years ahead CPI inflation also decreased to 3.4% in February, down 1.4 percentage points from September.
  • (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 results on own-price inflation are based on the question ‘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’.

Unit cost growth, own-price inflation and wage growth

In the DMP survey, businesses are also asked to report their average unit cost growth and wage growth. Average unit cost is defined as the average cost required to produce a single unit of a good or service. In February, unit cost growth pressures continued to soften. Businesses reported that unit costs had grown by 9.8% in the year to February, down from 10.8% in the year to November (Chart 3, Panel A). Over the coming year, firms expected their unit costs to grow by 7.0%, down from 8.6% in February (Chart 3, Panel B). However, this fall in unit cost growth was accompanied by an increase in annual wage growth, which ticked back up to around 6.6% in February, up from 6.1% in November (Chart 3, Panel A). Businesses expected that their wage growth over the next year would be 5.7% in February, down 0.1 percentage point from November (Chart 3, Panel B).

Chart 3: Realised and expected unit cost growth pressures continued to soften

Unit cost growth, own-price inflation and wage growth (a)

In February, unit cost growth pressures continued to soften. Businesses reported that unit costs had grown by 9.8% in the year to February, down from 10.8% in the year to November. However, this fall in unit cost growth was accompanied by an increase in annual wage growth, which ticked back up to around 6.6% in February, up from 6.1% in November.In February, unit cost growth pressures continued to soften. Businesses reported that unit costs had grown by 9.8% in the year to February, down from 10.8% in the year to November. However, this fall in unit cost growth was accompanied by an increase in annual wage growth, which ticked back up to around 6.6% in February, up from 6.1% in November.
  • (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.

Wage growth and CPI inflation expectations

A strong relationship between wage growth and CPI expectations (Chart 4) could help to explain the ongoing strength in wage growth, despite CPI expectations starting to decline in recent months (Chart 2). In general, pay settlements tend to occur in the first quarter of calendar years, and so recent increases in annual wage growth could be attributable in part to this. In February, firms were also asked to comment on factors affecting their expected wage growth in the year ahead. Common things cited were inflation expectations and the cost of living, firm profitability and ongoing supply issues, recruitment and retention challenges, and the upcoming rise in the National Living Wage from 1 April 2023 (rising by 9.7%).

Chart 4: Year ahead expectations for annual wage growth and CPI are correlated

Annual CPI one-year expectations and annual wage growth one-year expectations (a)

Although these CPI expectations have been declining in recent months, the strong relationship between wage growth and CPI expectations could help to explain the ongoing strength in wage growth. In general, pay settlements tend to occur in the first quarter of calendar years, and so recent increases in annual wage growth could be attributable in part to this.
  • (a) 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. The results on CPI inflation 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, one year from now?’ Results are pooled from firms’ responses from May 2022 to February 2023. Since the questions on wage growth and CPI perceptions/expectations are not asked within the same DMP survey questionnaires, firms’ responses to wage growth in one month are compared against their CPI responses two months prior.

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 been decreasing since September. The percentage of respondents who reported that the overall level of uncertainty facing their business was high or very high was 56% in the three months to February (Chart 5), and the single month number for February was even lower at 53%. Despite this steady decrease in the recent months, overall uncertainty was still above the 48% reported in the first quarter of 2022. Sales uncertainty, as calculated from the distribution of expectations, has also been decreasing since October 2020 but is still above its pre-pandemic level. On the other hand, uncertainty about prices has fallen in the recent months after rising materially in 2022 although it remains at a historically high level.

Chart 5: Overall uncertainty and sales uncertainty has continued to decline in February, while price uncertainty remains elevated

Inflation, sales and overall uncertainty (a)

Overall uncertainty has been decreasing since September. Sales uncertainty has also been decreasing since October 2020 but still above its pre-pandemic level. Uncertainty about prices has fallen in the recent months after rising materially in 2022 and remains near historically high level.
  • (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.

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 February 2023. The February survey was in the field between 3 and 17 February. In February we received 2,462 responses.

Further monthly data from the February survey for a limited number of DMP series was published on 2 March 2023. Aggregate level data for all survey questions are published on a quarterly basis. Data from the November to January surveys were released on 2 March. 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.

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