Output price inflation
Annual own price inflation among firms in the DMP has declined gradually for most of this calendar year. In the three months to November, annual own price growth was 6.6%, down from 7.4% in the three months to August (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 November, expected price growth was 4.4%, suggesting a decline in price inflation of around 2.2 percentage points is expected over the next 12 months.
Realised and expected price growth have developed differently for goods and services providers. Firms in the goods sector have experienced a fall in their own price expectations for most of this calendar year. In data collected during the three months to November, price growth for firms in the goods sector was expected to slow down by 2.9 percentage points over the next year (from 6.7% over the past 12 months to 3.8% over the year ahead). Meanwhile, services providers have experienced lower annual price growth, but expect a smaller decline over the next year. In the three months to November, annual price growth for firms in the services sector was 6.5%, and year-ahead expectations were 4.9%, meaning that these firms expect a 1.6 percentage point fall in their own price growth over the next year.
Chart 1: Realised and expected price growth have declined over this calendar year
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. The purple bars correspond to the difference between the orange and aqua lines. The chart shows three-month average data.
Wage growth
Annual wage growth has steadily increased since the start of the year. In the three months to November, firms reported that their average wage growth per employee was 7.0% (Chart 2). This follows increases in regular pay growth as reported by the ONS. In October, annual growth in the three-month average of weekly regular pay (which excludes bonuses and pay arrears) was 7.3% in official statistics. However, firms do expect slower pay growth in the year ahead. In the three months to November, firms in the DMP expected year-ahead wage growth to be 5.1%.
In addition to slowing wage growth, firms also expect a fall in their employment growth over the next year. In the three months to November, firms reported annual employment growth of 2.9%, and expected employment growth of 1.4%, indicating that firms expect a 1.5 percentage point decline in their employment growth over the next year.
Chart 2: Annual and expected wage growth have increased marginally
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: lowest, low, middle, high, highest?’. 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 chart shows three-month average data.
CPI inflation perceptions and expectations
Short-term and medium-term CPI inflation expectations have also fallen since the end of 2022. In the three months to November, firms expected CPI inflation to be 4.6% one year from now (Chart 3). Three-year ahead CPI inflation expectations have been more stable. Firms expect CPI inflation to be 3.2% three years from now.
Firms in the DMP are also regularly asked about their current CPI perceptions. These have followed the trend of declining annual CPI inflation rates from the ONS over the past year, suggesting firms are paying attention to aggregate inflation trends (Chart 3). In the three months to November, perceived annual CPI inflation was reported to be at 6.8%, close to the average annual CPI inflation calculated for the same period.
Chart 3: Short-term inflation expectations have followed trends in official statistics
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 questions: ‘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 three-month average data.
Borrowing rates
During November, firms in the DMP were asked about the interest rates they have been paying on their borrowing (both bank and market based). Firms reported paying an interest rate of 6.6% on their current borrowing, on average. This represents a material increase over the past two years; firms reported their average borrowing rates were 3.5% at the end of 2021, and 4.8% in November 2022. Over the next 12 months, firms expect the interest rate charged on their borrowing to decrease slightly to 6.2%.
The increase in interest rates over the past year also exceeds firms’ earlier expectations. In November 2022, firms expected the average interest rate on their borrowing to be 5.8% in November 2023. That is 0.8 percentage points lower than the rate they currently report. This difference likely reflects the extent of monetary tightening over this period.
Chart 4: Borrowing rates have increased since 2021
Interest rate charged on borrowing in 2021, now, and one year ahead (a)
Footnotes
- (a) The results on borrowing rates are based on the following question: ‘What is the approximate average annualised interest rate on the interest-bearing borrowing that your business currently 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 chart shows data collected in November 2023.
Impact of higher interest rates
In November, firms were asked questions about how rises in interest rates since 2021 have impacted their levels of sales, employment, and capital expenditure in Q3 of 2023, and their expectations for these effects in Q3 of 2024. The questions referred to ‘interest rates’ rather than Bank Rate or any other specific interest rates. On average, firms reported a negative impact across all variables in 2023 Q3 (Chart 5). Firms estimated that higher interest rates had lowered their level of capital expenditure by 8.4% in Q3 of 2023, and they expected investment to be 10.4% lower by Q4 of 2024. Similarly, employment was estimated to have been 1.3% lower in 2023 Q3, with employment expected to be 2.3% lower in 2024 Q3. Firms also reported that higher rates had lowered their sales by around 4.6% so far, with little further change expected over the year ahead. This estimated sales impact indicates that the effects firms report on employment and investment take account of broader influences from lower demand, as well as more direct impacts from the interest rates facing firms. Furthermore, overall investment growth reported in the DMP survey has been slowing in recent months, consistent with a building impact from higher interest rates.
Chart 5: Higher interest rates have had a negative impact on sales, employment and capital expenditure
Impact of higher interest rates on level of sales, employment, and capital expenditure in Q3 of 2023 and Q3 of 2024 (a)
Footnotes
- (a) The results on impact of interest rates are based on the following questions: ‘Holding other factors constant, what is your best estimate of the impact of changes in interest rates since the end of 2021 on the sales/employment/capital expenditure of your business in each of the following periods: 2023Q3 and 2024Q3? Please provide an estimate in percentage terms of how much higher/lower you expect the level of your sales/employment/capital expenditure to be in each period.’. The chart shows data collected in November 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 November 2023. The November survey was in the field between 3 and 17 November. The November survey received 2,428 responses.
Further monthly data from the November survey for a limited number of DMP series was published on 30 November 2023. Aggregate level data for all survey questions are published on a quarterly basis. Data from the August to October surveys were released on 2 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.