Drivers of Inflation
Among the industries surveyed, professional, scientific, and technical services along with finance and insurance lead one-year out inflation expectations of businesses surveyed. While inflation expectations have dropped for most of the industries, professional, scientific, and technical services continues to have the highest inflation expectations both one- and five-years out.
The professional, scientific, and technical services sector also had the largest shift over the quarter, with inflation expectations dropping to 4.6% one-year out, a full percentage-point below the readings for the first quarter.
Five-year inflation expectations for professional, scientific, and technical services have experienced a relatively smaller decrease of 0.2 percentage points to 4.0%. The drop in inflation five-years out is smaller across sectors than we see one-year out. That is not unusual. A similar pattern can be seen across consumer expectations (see Chart 4).
The retail sector has experienced the largest deceleration in inflation expectations for one year out, with a decrease from 7.0% in the first wave to 4.6% in the current quarter. The health care sector has the lowest inflation expectations over the five-year horizon.
Demand was most cited for the reason behind the drop in inflation expectations in the first and second quarters of 2023. This reflects a weakening of overall economic conditions in the first quarter and a more rapid cooling in producer prices than consumer prices. (see Chart 5)
The market volatility of the last few months has forced businesses to consider the impact of rising interest rates. The respondents who believe central bank policy is an influential inflation factor jumped from 46% to 55% since last quarter, which suggests the Fed is getting some credit for the cooling of inflation we are experiencing.
Environmental, Social and Governance (ESG) regulations and COVID have consistently ranked low as a determinant of inflation expectations. The World Health Organization declared that COVID-19 is no longer a global health emergency; the price uncertainty associated with COVID-19 has receded to the lowest on record for the survey.