The Business Inflation Expectations Survey (BIES) for June 2020

IIMA Business inflation expectations survey – Slight early signs of optimism

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Chart 1 BIES Survey June 2020 Inflation expectations IIMA

The Business Inflation Expectations Survey (BIES) provides ways to examine the amount of slack in the economy by polling a panel of business leaders about their inflation expectations in the short and medium-term. This monthly survey asks questions about year-ahead cost expectations and the factors influencing price changes, such as profit and sales levels. The survey is unique because it goes straight to businesses – the price setters – rather than to consumers or households, to understand their expectations of the price level changes. 

One significant advantage of BIES is that one can get a probabilistic assessment of inflation expectations and thus get a measure of uncertainty. It also provides an indirect assessment of the overall demand condition of the economy. Therefore, the results of this Survey are useful in understanding the inflation expectations of businesses and complement other macro data required for policymaking. With this objective, the BIES was introduced at IIMA from May 2017. 

The BIES questionnaire is finalized based on the detailed feedback received from the industry, academicians, and policymakers. A copy of the questionnaire is available below. Companies are selected primarily from the manufacturing sector. The ‘BIES – June 2020’ is the 37th round of the Survey. These results are based on the responses of around 1200 companies.

Summary results

One year ahead business inflation expectations in June 2020 have declined marginally by 12 basis points to 4.12% from 4.24% reported in May 2020. However, they continue to remain over 4% for four consecutive months.

The percentage of firms expecting significant (over 6%) cost increase has been gradually declining. However, the percentage of firms reporting moderate (in the range of 3% to 6%) cost increase has sharply increased – from 16% in May 2020 to 22% in June 2020.

While there seems to be some improvement of sales in the ‘much less than’ category, around 91% of the firms in the sample still report that sales are ‘somewhat or much less than normal.’ Note that this proportion has remained over 70% since June 2019.

Responses on profit margins also show some early signs of optimism.

Inflation expectations

One year ahead, business inflation expectations in June 2020, as estimated from the mean of the individual probability distribution of unit cost increase, have declined marginally by 12 basis points to 4.12% from 4.24% reported in May 2020. However, they continue to remain over 4% for four consecutive months. The trajectory of one year ahead of business inflation expectations is presented in Chart 1.

Uncertainty of business inflation expectations, as captured by the square root of the average variance of the individual probability distribution of unit cost increase, has marginally increased to 2.1% from 2.0% May 2020.

Chart 1: One year ahead business inflation expectations (%)

Chart 1 BIES Survey June 2020 Inflation expectations IIMA
Chart 1 BIES Survey June 2020 Inflation expectations IIMA

 

Costs

The cost perceptions data shows some early signs of moderation of cost pressures. The percentage of firms expecting significant (over 6%) cost increase has been gradually declining in the sample. However, the percentage of firms reporting moderate (in the range of 3% to 6%) cost increase has sharply increased – from 16% in May 2020 to 22% in June 2020. As a result, 58% of the firms now believe that the current cost increase is 3.1% and above compared to the same time last year – up from 53% reported in May 2020 (Chart 2).

BIES Survey June 2020 Chart 2 IIMA

Sales Levels

Over 71% of the firms in June 2020 report that sales are ‘much less than normal’ as against over 75% in May 2020 and 81% firms reporting in March 2020.2 While there seems to be some improvement of sales from ‘much less than’ category, around 91% of the firms in the sample still report that sales are ‘somewhat or much less than normal’ as against 92% reporting in May 2020 (Chart 3). Note that this proportion has remained over 70% since June 2019.

Chart 3 BIES Survey June 2020 IIMA
Chart 3 BIES Survey June 2020 IIMA 2 ‘Normal’ means as compared to the average level obtained in the preceding three years. Data on perceptions of sales and profit is not available for April 2020.

 

Profit Margins

Over 68% of firms in the sample in June 2020 reported ‘much less than normal’ profit against 74% in May 2020. Over 86% of the firms in the sample in June 2020 expect ‘much less than normal or somewhat less than normal’ profit margins – down from 89% that reported in May 2020 (Chart 4). Note that this proportion was hovering around 75% from June 2019 till January 2020, after that it went up further.

BIES IIMA for June 2020 Profit Margins
BIES IIMA for June 2020 Profit Margins
BIES IIMA Questionnaire
BIES IIMA Questionnaire

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