Business Inflation Expectations Survey (BIES) – October 2021

: 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, sales levels, etc. The survey is unique in that it goes straight to businesses – the price setters – rather than to consumers or households, to understand their expectations of the price level changes. One major 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 overall demand condition of the economy. Results of this Survey are, therefore, useful in understanding the inflation expectations of businesses and complement other macro data required for policy making. With this objective, the BIES was introduced at IIMA from May 2017. The questionnaire of BIES is finalized based on the detailed feedback received from the industry, academicians and policy makers. A copy of the questionnaire is annexed.

 

Companies are selected primarily from the manufacturing sector. The “BIES – October 2021” is the 54th round of the Survey. These results are based on the responses of around 1200 companies.

 

1. Inflation expectations

 

• One year ahead business inflation expectations in October 2021, as estimated from the mean of individual probability distribution of unit cost increase, have declined by 28 basis points to 5.47% from 5.75% reported in September 2021. The trajectory of one year ahead business inflation expectations is presented in Chart 1.

 

• The uncertainty of business inflation expectations in October 2021, as captured by the square root of the average variance of the individual probability distribution of unit cost increase, has remained elevated at 2.2%.

 

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

 

 

 

• Respondents were also asked to project one year ahead CPI headline inflation through an additional question using a probability distribution. This question is repeated every alternate month, coinciding with the month of RBI’s bi-monthly monetary policy announcement.

 

• Survey responses indicate an increase in one year ahead CPI headline inflation expectation. The businesses in October 2021 expect one year ahead CPI headline inflation to be 5.06%, marginally up from 4.98% reported in August 2021, with a relatively low standard deviation of 1.02% (Chart 2). It has remained above 5% since June 2021.

 

Chart 2: Expected CPI headline inflation (%) – one year ahead

 

 

1. Costs

 

• The cost perceptions data indicates a mixed picture. There is a decline in number of firms perceiving very high cost increase (over 10%). Still around 1/3^rd of the firms are reporting more than 10% cost increase.

 

• Further, the number of firms perceiving significant cost increase (over 6%) has remained around 59% during last two rounds of the survey (Chart 3).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chart 3: How do current costs per unit compare with this time last year? – % responses

 

 

1. Sales Levels

 

• Sales expectations have shown a marked recovery. Around 29% of the firms now report that sales are ‘much less than normal’, as compared to 33% reported in September 2021 (Chart 4)[1].

 

• There is a sharp increase in number of firms perceiving greater than normal sales. Qualitatively, sales expectations are back to May 2019 level.

 

Chart 4: Sales Levels – % response

 

1. Profit Margins

 

• Around 45% of the firms in the sample in October 2021 report ‘much less than normal’ profit – down from 48% reported in September 2021 (Chart 5).

 

• About 19% of the firms now report ‘about normal’ profit expectations – up from 15% reported in September 2021.

 

Chart 5: Profit Margins – % response

 

Business Inflation Expectation Survey (BIES) – Questionnaire

 

A. Current Business Conditions   Q1. How do your current PROFIT MARGINS@ compare with “normal”* times? o   Much less than normal o   Somewhat less than normal o   About normal o   Somewhat greater than normal o   Much greater than normal   Q2. How do your current sales levels compare with SALES LEVELS@ during what you consider to be “normal”* times? o   Much less than normal o   Somewhat less than normal o   About normal o   somewhat greater than normal o   Much greater than normal   @   of the main or most important product in terms of sales. *”normal” means the average level obtained during the corresponding time point of preceding 3 years, excluding the Covid-19 period.

B. Current Costs Per Unit^ Q3. Looking back, how do your current COSTS PER UNIT^ compare with this time last year? o   Down (< -1%) o   About unchanged (-1% to 1%) o   Up somewhat (1.1% to 3%) o   Up moderately (3.1% to 6%) o   Up significantly (6.1% to 10%) o   Up very significantly (> 10%) o ^   of the main or most important product in terms of sales.

C. Forward Looking Costs Per Unit$ Q4. Projecting ahead, to the best of your ability, please assign a percent likelihood (probability) to the following changes to costs per unit$ over the next 12 months.   % % % % % % o   Unit costs down (less than -1%) o   Unit costs about unchanged (-1% to 1%) o   Unit costs up somewhat (1.1% to 3%) o   Unit costs up moderately (3.1% to 6%) o   Unit costs up significantly (6.1% to 10%) o   Unit costs up very significantly (>10%)   $   of the main or most important product in terms of sales. Values should add up to 100%.

[1] “Normal” means as compared to the average level obtained in the preceding 3 years, excluding the Covid-19 period.