–Unanticipated Cost Increase Would Translate To Higher Consumer Prices
–Sales, Profit Margins Still Below Normal; Deteriorated Slightly In Aug

By Brai Odion-Esene

WASHINGTON (MNI) – The Atlanta Federal Reserve Bank’s monthly
survey released Wednesday showed businesses in the Sixth district raised
their inflation expectations for 2012 to 1.9%, but there was no change
in the measure of their uncertainty regarding the future price

The survey also included a special question which noted that if
firms experienced an unanticipated rise in costs, most of it would
result in higher consumer prices.

The survey respondents’ expectation of a 1.9% increase is up from
the +1.7% expectation in last month’s survey, but businesses’ inflation
uncertainty was unchanged at 2.8% in August.

Firms reported that unit costs had risen 1.6% on an annual basis,
down from their assessment of a 1.5% rise in July.

The survey was conducted August 1317 with 169 firms responding to
questions about their business conditions, inflation outlook, and
potential pricing pressures.

The survey noted businesses are still operating in an environment
of below normal sales levels and profit margins — “both of which
deteriorated slightly in August,” it said.

On their inflation outlook, “Firms continue to anticipate little or
moderate upward pressure coming from input costs over the next 12
months,” the Atlanta Fed said.

The survey said expectations for non-labor costs over the next year
rose for the second consecutive month in August. Expectations for labor
costs also rose slightly.

“Respondents also anticipate that sales levels and margin
adjustments are both likely to have a modest upward influence on the
prices they charge in the coming year,” the Atlanta Fed said.

The survey included a special question aimed at gauging how firms
perceive their pricing power.

The survey participants were presented with a hypothetical,
unanticipated rise in unit costs and asked how much of that cost hike
they would likely pass along to their customers. The Atlanta Fed said
the panel was randomly divided into two groups — one was given a 2%
unit cost increase and the other a 6% unit cost increase.

“According to respondents, most of the unanticipated cost increase
would translate to higher prices for customers. On average, firms facing
a 2% cost increase said they would pass about 1.3 percentage points on
to their customers. For those facing a 6% cost hike, the pass-through,
on average, was a relatively comparable 3.8 percentage points,” The
Atlanta Fed said.

** MNI Washington Bureau: 202-371-2121 **