Output price inflation
Annual own price inflation among firms in the DMP has continued to decline gradually since the start of the calendar year. In the three months to May, annual own price growth was 4.9%, down from 5.6% in the three months to January (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 price inflation. In the three months to May, expected own price growth was 3.9%, suggesting a decline in price inflation of around 1.0 percentage point is expected over the next 12 months.
Realised and expected price growth have developed differently for goods and services providers. Services providers price inflation had a lower peak, but these firms have seen a slower decline in their own price inflation than firms in the goods sector. In data collected during the three months to May, own price growth for firms in the services sector was 5.4%, while firms in the goods sector saw an annual own price growth of 4.3%. Both sectors expect annual own price inflation to slow down by 1.0 percentage point over the next year. This implies that firms in the services sector expect their own price growth to decrease to 4.4% over the year ahead, and firms in the goods sector anticipate a decline to 3.3% over the year ahead.
Chart 1: Realised and expected annual own-price growth has been declining in recent months
Realised and expected annual price inflation and change in inflation expected over the next year (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.
Pricing dynamics
Most prices in the economy do not adjust instantaneously, due to various costs and frictions associated with changing prices. Firms that set prices in response to events are often referred to as behaving in a ‘state-dependent’ way, whereas those changing prices at fixed intervals are described as being ‘time-dependent’. These two pricing approaches have different implications for how inflation responds to (large) shocks. Firms that identify as setting prices in a state-dependent way can adjust the speed and magnitude of price changes with the size of the shock. In contrast, businesses behaving in time-dependent manner will act independently of the size of the shock, which implies they may have less flexibility than state-dependent firms when setting prices as they only decide the magnitude rather than the timing of their adjustment.
Evidence from the DMP has been broadly consistent with theory. In the DMP state-dependent firms saw a larger and earlier rise in inflation than time-dependent firms, and a steeper and more persistent decline (Chart 2). Since December 2023, the average inflation rate of state-dependent firms has been below time-dependent businesses and since March 2024 is around 1.0 percentage point lower.
Looking forward, the markers on the right of Chart 2 show that time-dependent firms expect their own-price inflation to fall by around 1.4 percentage points over the next year in the three months to May, compared to a fall of only 0.8 percentage points for state-dependent firms. Despite time-dependent firms expecting price growth to fall sharply over the next year to 4.2% in the three months to May, these firms’ year-ahead price growth expectations remain 0.5 percentage points higher than that of state-dependent businesses.
Chart 2: State-dependent firms have experienced a sharper decline in their own price inflation during 2024
Realised and expected annual inflation rates by how firms set prices (a)
Footnotes
- (a) The series 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?’. For the last question, 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. Firm price-setting behaviour is based on the question: ‘Which of the following best describes how your business usually sets prices?’. Respondents were asked to choose one of the following options: (i) Mostly change prices in response to specific events (eg changes in costs or demand), (ii) Mostly change prices at fixed intervals (eg once a year or once a quarter, etc). The chart shows three-month average data.
Wage growth
Annual wage growth has steadily declined since the start of the year. In the three months to May, firms reported that their average wage growth per employee was 6.0% (Chart 3). This follows decreases in regular pay growth as reported by the ONS. In April, official statistics showed that the annual growth in the three-month average of weekly regular pay (which excludes bonuses and pay arrears) was 6.0% across the whole economy and 5.8% within the private sector. Firms expect the declines in pay growth to continue over the year ahead. In the three months to May, firms in the DMP expect year-ahead wage growth to be 4.5%.
Wage growth for providers of consumer-facing services (eg accommodation and food, health, and recreational services) has consistently been above that of business-facing services providers. Annual wage growth for firms in the consumer-facing services sector during the three months to May was 6.9%, and year-ahead expectations were 5.5% in the three months to May, meaning that these firms expect their wage growth to fall by around 1.4 percentage points over the next year. Business-facing services producers expect a slightly larger decline in wage growth, anticipating that it will fall by 1.5 percentage points from 5.6% over the past 12 months to 4.1% over the year ahead.
Chart 3: Annual and expected wage growth continue to steadily decline
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.
Frequency of wage changes
In the DMP survey, firms were recently asked about the frequency of their wage adjustments in 2019 and 2023, and their expectations for 2024. Most firms report that they only change wages once throughout the calendar year (Chart 4). However, during the high inflation period the proportion of firms reporting changing wages more than once a year rose markedly from 3% in 2019 to 11% in 2023, while the share of firms reporting no change in wages fell by 7 percentage points between 2019 and 2023 to 3%. For the year ahead, the proportion of firms expecting to change wages more than once a year in 2024 has declined by 6 percentage points to 5%, consistent with some normalisation of wage setting. Firms changing wages more than once a year also saw higher realised wage growth than firms who change wages only once a year. Average realised annual wage growth during 2023 was 7.9% for firms changing wages more than once a year, and 6.6% for firms changing wages only once year.
Chart 4: In 2024, firms expect to change wages less often than they did in 2023
Frequency of wage changes in 2019, 2023, and expected wage changes in 2024 (a)
Footnotes
- (a) The results on frequency of wage changes are based on the question: ‘How often did you change/do you expect to change the wages of a typical employee in your business in each of the following years?’. Respondents were then asked to choose one of the following options for years 2019, 2023 and 2024: more than twice a year, twice a year, once a year, and wages did not change.
Just over half of firms change wages in April, according to DMP respondents. April aligns with the start of the new tax year and the legally mandated changes to the National Minimum and National Living Wage. Firms changing wages in April are also more likely to be in lower paying sectors. Firms reporting that they change wages in April report higher realised annual wage growth than firms who set wages in other calendar months (Chart 5). In the three months to May, annual wage growth for firms who typically change wages in April was 6.3% compared to 5.5% for those who set wages in other months. Year-ahead expectations were also higher for April wage setters. Annual wage growth for both April and non-April wage setters was expected to slow down by 1.5 percentage points over the next year, reaching 4.8% for those who adjust wages in April and 4.0% for those adjusting wages at other times of the year.
Chart 5: Firms reporting that they change wages in April report higher realised and expected annual wage growth
Annual and expected year-ahead wage growth month firms adjust wages (a)
Footnotes
- (a) The series 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. When firms adjust wages is based on the question: ‘For 2024, in which month/s of the year do you expect the wages for a typical employee to change?’. The chart shows three-month average data.
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 2024. The May survey was in the field between 10 and 24 May. The May survey received 2,317 responses.
Further monthly data from the May survey for a limited number of DMP series was published on 6 June 2024. Aggregate level data for all survey questions are published on a quarterly basis. Data from the February to April surveys were released on 9 May. More information can also be found on the DMP website.
The panel was set up in August 2016. It is run by the Bank of England in collaboration with King’s College London 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.