Output price inflation
Annual own price inflation among firms in the DMP has started to decline modestly in recent months. In the three months to August, annual own price growth was 7.4%, down from a peak of 8.1% in the three months to February (Chart 1). This refers to prices charged by businesses across the whole economy, rather than just those selling directly to consumers. Looking to the year ahead, firms expect further declines in their price inflation. In the three months to August, expected price growth was 4.9%, suggesting a decline in price growth of around two and a half percentage points over the next 12 months.
Realised and expected price growth have developed differently for goods versus services providers. Firms in the goods sector expect their price growth to slow down by 3.4 percentage points over the next year (from 7.9% over the past 12 months to 4.5% in the year ahead). Meanwhile, services providers have experienced lower annual price growth recently, but also expect a smaller decline over the next year. In the three months to August, annual price growth for the services sector was 7%, and year-ahead expectations were at 5.2%.
Chart 1: Realised and expected price growth have declined in recent months
Annual and expected year-ahead own 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 chart, solid lines are three-month moving averages. The purple bars correspond to the difference between the orange and aqua lines.
Wage growth
Annual wage growth has increased since the start of the year. In August, firms reported that their average wage growth per employee was 6.9% (Chart 2). Note that this chart reports single-month averages, rather than three-month averages as in Chart 1. This follows increases in regular pay growth as reported by the ONS. In the three months to July, average annual regular pay growth was 7.8% in official statistics. However, firms do expect slower pay growth in the year ahead. In August, expected year-ahead wage growth was 5%.
In addition to higher wage costs, firms have also experienced high cost growth over the past year. In July 2023 (the last month the question on unit costs was asked), firms reported annual cost growth of 9.5%. This is down from a peak of 10.8% annual cost growth reported in November 2022. Firms also expected their cost growth to decline by 2.7 percentage points over the coming year, to 6.8%.
Chart 2: Annual wage growth has increased in recent months
Annual and expected year-ahead wage growth (a)
Footnotes
- (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 purple bars correspond to the difference between the orange and aqua lines. The figure shows single-month data.
CPI inflation perceptions and expectations
Short-term CPI inflation expectations have fallen materially since the end of 2022. In August, firms expected CPI inflation to be 4.8% one year from now (Chart 3.A). Note that this chart reports single-month averages, rather than three-month averages as in Chart 1. Year-ahead CPI expectations have also become much less dispersed among firms compared with six and 12 months ago (Chart 3.B). CPI expectations three years from now have also declined in recent months. In August, CPI expectations three years in the future were 3.2%, on average.
Firms in the DMP are also regularly asked about their current CPI perceptions. These have followed annual CPI inflation rates very closely over the past year, suggesting firms are paying attention to aggregate inflation trends (aqua line in Chart 3.A). As shown in Chart 4.A the majority of firms cite CPI inflation as one of the most important factors affecting their pricing decisions. A recent Bank Underground post examines the responsiveness of firms’ own price and CPI inflation expectations to monthly CPI outturns. Own price expectations respond significantly to changes in CPI inflation, particularly over the 2022–23 period.
Chart 3.A: Short-term inflation expectations have declined in recent months
Current CPI inflation perceptions, one-year and three-year CPI expectations (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?’. Annual CPI inflation data is taken from the ONS. We calculate the average CPI inflation rate during each DMP survey window. The chart shows single-month data.
Chart 3.B: One-year ahead CPI inflation expectations have become less dispersed over the past year
One-year ahead CPI inflation expectations (a)
Importance of CPI inflation and competitors’ prices
Between May and July 2023, firms in the DMP were asked about the importance of CPI inflation and their competitors’ prices for their current pricing decisions. CPI inflation was cited as either in the top three or the most important factor in current pricing decisions by 60% of firms (Chart 4.A). Citing CPI inflation as one of the top three most important factors was more common among larger firms and those in the services sector. Furthermore, firms who cited CPI as a top three factor tended to have higher own price expectations in the year ahead (Chart 4.B), suggesting there may be a relationship running from aggregate inflation trends to own price-setting behaviour. Competitors’ prices were cited as either in the top three or the most important factor by around two-thirds (68%) of firms. Larger firms as well as goods producers were more likely to cite competitor’s prices as one of the top three most important factors in current pricing decisions.
Chart 4.A: Both CPI inflation and competitors’ prices were among the most important factors affecting current pricing decisions
Importance of CPI inflation and competitors’ prices (a)
Footnotes
- (a) The results on the importance of CPI inflation and competitors’ prices are based on the following question: ‘How important are aggregate CPI inflation and your competitors’ prices as influences on your current pricing decisions?’. Firms can select one of the following options for each of CPI inflation and competitors’ prices: Not important; One of many factors; In top three most important factors; Most important factor. The results in this chart are based on the data collected between May 2023 and July 2023.
Chart 4.B: Firms who consider CPI inflation to be among the most important factors affecting pricing expect higher own price growth in the year ahead
Expected year-ahead own price inflation by importance of CPI inflation (a)
Footnotes
- (a) The results on the importance of CPI inflation are based on the following question: ‘How important are aggregate CPI inflation and your competitors’ prices as influences on your current pricing decisions?’. Firms can select one of the following options for each of CPI inflation and competitors’ prices: Not important; One of many factors; In top three most important factors; Most important factor. The results in this chart are based on the data collected between May 2023 and July 2023. 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.
Firm profit margins
Between May and July 2023, firms in the DMP were also asked about the change in their operating profit margins over the past year as well as their expectations for profit margins over the year ahead. Operating profit margins are defined as operating profits as a share of sales. 41% of firms had experienced a decline in profit margins over the past year, with 26% experiencing ‘large’ declines of over three percentage points (Chart 5). Meanwhile, 30% of firms saw their profit margins increase over the past year, and 29% experienced no material impact. Looking to the year ahead, firms expected to rebuild their profit margins, on average: 45% of firms expected to increase profit margins, whereas only 23% expected decreases.
The developments in profit margins depend on a number of industry-level and firm-level characteristics. Firms in the goods sector and those with higher average energy costs reported that they had experienced larger declines in profit margins. Firms in industries with higher sales concentration (a proxy for market power) have experienced smaller declines. Furthermore, real sales growth, price growth, and cost growth are all significantly correlated with developments in profit margins, both over the past year and for the year ahead. These results are discussed in further detail in two recent Bank Underground posts: Profit margins and firm price growth: evidence from the Decision Maker Panel and Profits in a time of inflation: some insights from recent and past energy shocks in the UK.
Chart 5: Firms experienced a decline in profit margins over the past year, but expect to rebuild margins over the year ahead
Realised and expected changes in profit margins (a)
Footnotes
- (a) The results on profit margins are based on the following questions: ‘In the first quarter of 2023 (January to March), what was your approximate operating profit margin (in percentage terms)? And what was it one year ago, in the first quarter of 2022?’ and ‘Looking a year ahead from the first quarter of 2023 to the first quarter of 2024, how do you expect your operating profit margin to change?’. For the year-ahead expectations, firms are asked to select one of the following five categories: Large increase (more than 3 percentage points); Small increase (3 percentage points or less); No material change; Small decrease (3 percentage points or less); Large decrease (more than 3 percentage points). The results in this chart are based on the data collected between May 2023 and July 2023.
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 2023. The August survey was in the field between 4 and 18 August. The August survey received 2,230 responses.
Further monthly data from the August survey for a limited number of DMP series was published on 7 September 2023. Aggregate level data for all survey questions are published on a quarterly basis. Data from the May to July surveys were released on 7 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.