05 Oct 2018 17:27 IST

IIM-A’s business survey for August sees spike in inflation outlook

Business Inflation Expectations Survey polls businesses on uncertainty in economy, price changes

The Business Inflation Expectations Survey (BIES) provides ways to examine the 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, and so on. The survey is unique in that it goes straight to businesses, the price-setters, rather than to consumers or households, to understand their expectations on price level changes.

BIES helps businesses and consumers make a fair assessment of inflation expectations and get a measure of the uncertainty ahead. It also provides an indirect assessment of overall demand conditions in the economy. The survey’s results are, therefore, useful in understanding the inflation expectations of business while they also generate other macro data required for policy-making.

Towards this objective, IIM-A introduced the BIES from May 2017. The questionnaire is based on the detailed feedback received from the industry, academicians and policy-makers.

Companies, mostly in the manufacturing sector, are selected based on certain sampling criteria from the list of companies as available with the Ministry of Corporate Affairs (MCA). The BIES Survey of August 2018 is the 16th round. These results are based on the responses of over 1,600 companies.

Inflation expectations

* One year ahead business inflation expectation in August 2018, as estimated from the mean of individual probability distribution of unit cost increase, has further increased sharply to 4.5 per cent from 3.8 per cent observed in July 2018.

* Uncertainty of business inflation expectation in August 2018, as captured by the square root of the average variance of the individual probability distributions of unit cost increase, has remained elevated at around 2.25 per cent.

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

* Survey results indicate that businesses in August 2018 expect one year ahead CPI headline inflation to be 4.36 per cent (marginally up from 4.16 per cent observed in June 2018), with a relatively low standard deviation of 1.17 per cent

Costs

* Regarding cost perceptions, around 70 per cent of the firms in August 2018 reported that increase in costs has been more than 3 per cent (again up significantly from around 60 per cent observed in July 2018) during the last one year. The proportion of firms perceiving significant cost increase has further gone up to 41 per cent in August 2018 from 37 per cent in July 2018.

Sales Levels

* Around 45 per cent of the firms in the sample reported that sales were ‘normal or greater than normal’ in August 2018. This proportion has remained in the range of 45-46 per cent during the last three months.

Profit Margins

* Responses of 42 per cent of the firms in the sample in August 2018 indicate ‘much less than normal’ profit margins. Proportion of firms reporting ‘normal or above normal’ profit has been gradually declining during the last three months..