Output price inflation
Realised and expected output price growth reported by DMP respondents continued to increase in recent months, consistent with the rise in aggregate CPI inflation. In the three months to May, realised annual price growth in the DMP was 6.9%, on average, up from 5.4% compared with the three months to February (Chart 1). This refers to own 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 60% of firms reporting increases above 5%, and 27% of firms reporting increases above 10%. Price growth has been particularly high in the goods sector relative to services. In the three months to May, goods price inflation was 8.5%, compared with 5.7% for the services sector. The continuing rise in inflation likely reflects multiple factors, including significantly higher energy prices as well as supply and labour shortages (discussed in more detail below).
In addition to increases in realised inflation, expected year-ahead price inflation has also increased, reaching 5.9% in the three months to May, up from 4.8% in the three months to February. Thus, firms expect strong price inflation to persist over the next 12 months, although at a slightly slower rate than over the past year. Goods price inflation is expected be higher than services inflation in the year ahead.
Chart 1: Both realised and expected price inflation 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
In the May survey, businesses in the DMP were asked about their realised and expected growth in average unit costs and wages for the first time since before the Covid pandemic. Over the past 12 months, average unit costs were estimated to have increased by 8.8% (Chart 2). Average unit cost is defined as the average cost required to produce a single unit of a good or service. Manufacturing and other production (which includes agriculture, mining and utilities) sectors experienced the strongest growth in unit costs, at 14%. Over the next 12 months, firms expected unit cost growth to be 7.8% on average. In the cross-section of firms, there was a strong positive correlation between unit cost growth and price growth, both over the past year and for the year ahead. However, this relationship is less than one for one, implying that higher unit costs will likely lead to lower profit margins.
In May, firms’ realised wage growth over the past 12 months was reported to be 5.5% (Chart 2). That was lower than both firms’ own price inflation and CPI inflation rates. Over the next 12 months, businesses expected wage growth to be slightly lower than over the past year, at 4.8%, and lower than expected price growth. That implies firms do not expect a further acceleration in wage growth over the next year, despite the current high rate of inflation.
Chart 2: Unit cost growth has been stronger than average price growth, while wage growth has been weaker than price growth
Unit cost growth, own price growth and wage growth (May 2022) (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
In May, new questions were also added asking panel members for the first time 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, closely matching the official ONS statistics (Chart 3; note that the latest CPI data were released on 18 May, during the survey period, when CPI increased from 7% to 9%). CPI inflation one year ahead was expected to be 6.9%, lower than current inflation, but still elevated and above expectations for own price inflation. One year ahead CPI expectations are also highly dispersed across firms, varying between 4% and 10% at the 10th and 90th percentiles, respectively. Finally, CPI inflation expectations three years ahead were 3.8%, on average, similar to recent household survey data.
Chart 3: Perceived CPI inflation is consistent with official statistics, while one year and three year ahead expectations remain elevated
CPI inflation expectations, own price inflation and ONS CPI inflation (May 2022) (a)
Footnotes
- (a) 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, both one year from now and three years from now?’. 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?’. 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. ONS CPI data shown are data available on the day the survey was completed. For responses before 18 May, we use March CPI data, for responses submitted on or after 18 May we use April CPI data (which were released on 18 May).
Uncertainty
The nature of uncertainty facing firms in the DMP has evolved over the past few 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.
The increase in firms’ expected price growth (Chart 1) has been accompanied by higher inflation uncertainty, which is now at the highest level since the series began (Chart 4). Inflation uncertainty is generally higher for smaller firms and is associated with larger forecast errors by firms in predicting their own price growth. The measure of sales uncertainty has also increased slightly in recent months and remains above pre-pandemic levels. Finally, Chart 4 presents a measure of overall uncertainty, calculated as the percentage of respondents reporting current uncertainty for their business as ‘high’ or ‘very high’. This measure has been broadly stable at around 50% since mid-2021, although increased a little in the three months to May.
DMP members are also regularly asked about Brexit and Covid-19 as sources of uncertainty for their business. In May, both Brexit and Covid-related uncertainty were at the lowest levels since the questions were introduced, with 20% of firms considering Brexit as a top-three source of uncertainty, and 21% viewing Covid as a top-three source of uncertainty. In addition, starting in March 2022, businesses were asked about the Russia-Ukraine war as a source of uncertainty. In May, 33% of firms reported the war as a top-three source of uncertainty, a decline from 44% of firms in the initial March data (see Anayi et al (2022) for further analysis on the impact of the conflict on uncertainty).
Chart 4: Measures of inflation, sales and overall uncertainty have increased over the past three months
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.
Supply and labour shortages
Supply disruption has increased in recent months, following a modest decline at the beginning of the year. In May, firms estimated that 17% of their non-labour inputs had been disrupted, the highest level since November 2021. Disruption over the past three months has been particularly acute in the manufacturing, construction, and accommodation and food sectors, with over 20% of non-labour inputs being disrupted, on average. There is a strong positive relationship between supply disruption and both realised and expected unit cost growth, suggesting that this disruption is one important factor driving up firms’ costs.
In addition to supply disruption, recruitment difficulties have also increased further from already elevated levels. In May, 63% of businesses reported finding it ‘much harder’ than normal to recruit new employees. These difficulties are widespread, with over 45% of firms in every sector finding recruitment being ‘much harder’ than normal in the last three months. Finally, as reported in November 2021, there continues to be a clear positive relationship between recruitment difficulties and realised and expected output price growth.
Chart 5: Supply disruption and recruitment difficulties remain widespread
Percentage of non-labour inputs disrupted (left panel) and percentage of businesses currently finding it ‘much harder’ than normal to recruit (right panel) (a) (b)
Footnotes
- (a) Results on availability of non-labour inputs are based on the question: ‘Over the past month, has the availability of the non-labour inputs that your business uses been disrupted?’. Respondents provided a percentage impact figure.
- (b) Results on recruitment difficulties are based on the question: ‘Are you finding it easier or harder than normal to recruit new employees at the moment?’. Respondents could select from one of the following options: (i) Much easier, (ii) A little easier, (iii) About normal, (iv) A little harder, (v) Much harder, (vi) Not applicable – not recruiting at the moment.
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 May 2022. The May survey was in the field between 6 and 20 May. In May, there were 9,798 panel members and we received 2,608 responses.
Further monthly data from the May survey for a limited number of DMP series was published on 1 June 2022. Aggregate level data for all survey questions are published on a quarterly basis. Data from the November to January surveys were released on 3 February. 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.