By Ian McKendry

WASHINGTON (MNI) – The Atlanta Federal Reserve Bank said Friday a
survey of businesses show expectations are for inflation in 2012 to rise
1.8%, down slightly from their expectation in December for a 1.9%
increase.

The Business Inflation Expectations Survey, which will be released
monthly, was conducted Jan. 16-20 with 170 firms in the sixth district
responding to questions about their business conditions, inflation
outlook and potential pricing pressures.

“We want to learn more about the formation of expectations,
especially in the form of inflation expectations,” Michael Bryan,
Atlanta Federal Reserve vice president and senior economist, told
reporters in a conference call prior to the surveys inaugural release.

“To the best of my knowledge, this is the first systematic look at
business expectations and inflation expectations in the US and we think
that void in our knowledge is important to fill,” Bryan added.

Bryan compared the information in the report to the anecdotal
information the Federal Reserve collects in the Beige Book, saying the
BIE puts it in a more quantifiable form.

The survey asked businesses about their expected sales levels,
profit margins and unit costs.

Bryan said they posed the questions in the form of “unit costs”
apposed to inflation expectations because “the concept of inflation was
too far removed from the decisions that businesses make when they set
prices,” adding that the rise in unit costs should be identical to the
rise in inflation.

The survey said firms reported that their unit costs had risen 1.5%
from January last year, implying that they expect inflation to be higher
in 2012.

Firms also said their sales levels are still below normal and their
margins are depressed but have been improving since October, the survey
showed.

Businesses expect labor costs will put “only moderate upward
pressure on prices in the year ahead” with similar expectations for
non-labor costs except for 14% of respondents who said they expect costs
from materials and other non-labor inputs to put “strong upward
influence on prices,” according to the report.

The Atlanta Fed also included a special question intended to gauge
how frequently firms make small adjustments to their prices. “The
results were mixed,” it said.

A significant share of respondents said they do not make very small
price adjustments, with 35% saying they do not make price adjustments of
less than 1%.

Another 14% indicated that very small price adjustments are rather
rare — “either one or two of every 20 price changes,” the report said.

Bryan said the Atlanta Fed asked the question to get a better
understanding of price inflexibilities.

The survey was unique and is one of the reasons why they decided to
do it, he said.

“We have an opportunity to dig deeper in the mindset of businesses
when they set their prices.”

** Market News International Washington Bureau: 202-371-2121 **

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