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 August, annual own price growth was 4.0%, down from 4.9% in the three months to May (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 declines in price inflation to slow. In the three months to August, expected own price growth was 3.6%, suggesting a decline in price inflation of around 0.4 percentage points 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 August, own price growth for firms in the services sector was 4.7%, while firms in the goods sector reported an annual own price growth of 3.0%. Only firms in the services sector now expect annual own price inflation to slow over the year ahead. Data collected in the three months to August suggest that firms in the services sector expect their price inflation to fall to 3.9% over the year ahead. This implies that firms in the services sector expect their own price growth to slow down by 0.8 percentage points over the next year.
Chart 1: Declines in own price inflation are expected to slow over the year ahead
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.
CPI inflation perceptions and expectations
Short-term CPI inflation expectations have fallen materially since the end of 2023. In the three months to August, firms expected CPI inflation to be 2.7% one year from now (Chart 2). Firms also expect CPI inflation to be 2.7% three years from now. CPI inflation expectations three years from now have been more stable in recent months.
Firms in the DMP are also regularly asked about their current CPI inflation perceptions. These have followed annual CPI inflation rates closely, particularly during the period of high headline inflation, suggesting firms are paying attention to aggregate inflation trends (aqua line in Chart 2). A recent paper by Yotzov et al (2024) examines the responsiveness of firms’ CPI inflation perceptions to monthly CPI inflation releases in more detail. It finds firms update their current CPI inflation perceptions very quickly, often within hours of a monthly CPI inflation release.
Chart 2: Short-term CPI inflation expectations have declined in recent months
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 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?’. 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.
Wage growth
Annual wage growth has continued to decline. In the three months to August, firms reported that their average wage growth per employee was 5.8% (Chart 3). This follows decreases in regular pay growth as reported by the ONS. In July official statistics showed that the annual growth in the three-month average of weekly regular pay (which excludes bonuses and pay arrears) was 5.1% across the whole economy and 4.8% within the private sector. Looking to the year ahead, firms expect the declines in pay growth to continue. Firms reported that they expect year-ahead wage growth to be 4.1% in the three months to August.
Between May and August, businesses were asked to report their average realised unit cost growth. Average unit cost is defined as the average cost required to produce a single unit of a good or service. In August, unit cost growth pressures continued to weaken. Businesses reported that unit costs had grown by 5.6% in the three months to August, down from 9.4% in the three months to July last year. Unit cost growth have been shown to be significantly negatively correlated with developments in realised profit margins. This result was discussed in the Bank Underground post: Profit margins and firm price growth: evidence from the Decision Maker Panel. Between May and July, firms were asked about their average expected unit cost growth over the coming year. Firms expected their unit costs to fall by 0.9 percentage points to 4.8% in the three months to July.
Chart 3: Firms continue to expect declines in pay growth over the year ahead
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.
Firm profit margins
In the DMP survey, firms were asked about the change in their operating profit margins over 2022 and 2023 as well as their expectations for profit margins over the year ahead. Operating profit margins are defined as operating profits as a share of sales. Profit margins declined by around 0.7 percentage points in 2022 and remained stable in 2023. However, firms are rebuilding their profit margins and anticipate a 1.2 percentage point increase over the course of 2024. The proportion of firms reporting declines in profit margins fell from 40% in 2022 to 36% in 2023, while the share of firms reporting ‘large’ declines of over 3 percentage points fell by 8 percentage points between 2022 and 2023 (Chart 4). Meanwhile, 31% of firms saw their profit margins increase in 2023 compared to 30% in 2022, and 33% experienced no material impact in 2023 compared to 29% in 2022. Looking to the year ahead, 47% of firms expect to increase profit margins, whereas only 16% expected decreases.
Chart 4: Firms are rebuilding their profit margins and expect to continue this trend over the year ahead
Realised and expected changes in profit margins (a)
Footnotes
- (a) The results on profit margins are based on the following questions: ‘In the first quarter of 2023/2024 (January to March), what was your approximate operating profit margin (in percentage terms)? And what was it one year ago, in the first quarter of 2022/2023?’; and ‘Looking a year ahead from the first quarter of 2024 to the first quarter of 2025, how do you expect your operating profit margin to change?’. For the year-ahead expectations, firms are asked to select one of the following five categories: Large increase (more than 3 percentage points); Small increase (3 percentage points or less); No material change; Small decrease (3 percentage points or less); Large decrease (more than 3 percentage points). The results for 2022 are based on the data collected between May 2023 and July 2023. The results for 2023 and 2024 (expected) are based on the data collected between May 2024 and July 2024.
Capital expenditure growth
Overall investment growth and expectations for future investment had been falling over the last three quarters of 2023, but recent data for 2024 Q1 shows that realised and expected investment growth ticked back up. Firms reported annual investment growth rose from 0% in 2023 Q4 to 2.4% in 2024 Q1 (Chart 5). Expected annual investment growth rose by 6.6 percentage points to 5.3% for 2025 Q1. Firms therefore expect a 2.9 percentage point rise in their capital expenditure between Q1 of this year and Q1 of next year. However, given the volatility in this growth series, these values should be interpreted with caution.
The DMP has also asked firms about the interest rates they have been paying on their borrowing (both bank and market based). In the three months to August, firms reported paying an interest rate of 6.9% on their current borrowing, on average. Over the next 12 months, firms expect the interest rate charged on their borrowing to decrease to 6.0%. The expected decrease in interest rates likely reflects firms’ expectation of more monetary loosening over the year ahead.
Chart 5: Realised and expected capital expenditure growth rose in 2024 Q1
Annual and expected year-ahead capital expenditure growth (a)
Footnotes
- (a) The results on capital expenditure growth are based on questions: ‘In the last quarter, what was the approximate sterling value of your CAPITAL EXPENDITURE (in £, THOUSANDS)?’; ‘Looking back over the past year, what was the approximate sterling value of your CAPITAL EXPENDITURE in the same quarter a year earlier (in £ THOUSANDS)?’; and ‘Looking ahead a year, what would be the approximate sterling value of CAPITAL EXPENDITURE you expect for the same quarter in each of the following scenarios: lowest, low, middle, high, highest (in £ THOUSANDS)?’. A point estimate is constructed by combining the five scenarios with the probabilities attached to them. The chart shows calculated quarterly capital expenditure growth rate 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 August 2024. The August survey was in the field between 2 and 16 August. The August survey received 2,185 responses.
Further monthly data from the August survey for a limited number of DMP series were published on 5 September 2024. Aggregate level data for all survey questions are published on a quarterly basis. Data from the May to July surveys were released on 1 August 2024. 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.