Most failed to appreciate the extent to which inflation would rise in 2021 and 2022, and most failed to anticipate the extent of the fall in 2023. Even now, the stubbornness of inflation in the US is surprising some, probably including the Fed. In the Standard Bank’s view, one of the more reliable indicators of future inflation is starting to suggest that new pressures could be brewing.

In the Standard Bank's view, the best indicator of future inflation is survey data that records firms pricing intentions. That might seem obvious, but it does not seem at all clear to us that this sort of data gets much airtime amongst the forecasting community and even amongst central banks. For instance, if you were to look at central bank assessments of inflation prospects, like the Bank of England’s Inflation Report (which is now called the Monetary Policy Report), you wouldn’t find any reference to firms’ pricing plans. You will find a discussion of survey data, which includes firms’ expectations for future inflation, but that’s very different from surveys that ask firms about their plans for their own prices.

The reason it is different is that firms know what will happen to the prices they charge over the short-term, meaning the next few months, but they won’t know what will happen with general inflation. Consumer inflation expectations are also used by forecasters, but consumers probably know even less about where inflation is likely to be in the future. All consumers seem to do is look at what prices are doing now and assume that this will continue for some period of time; in short, they are a lagging indicator, not a leading indicator.

In contrast, changes in firms’ plans for the prices they charge can be a good leading indicator of inflation, and it is this that is crucial for forecasters. If we take the UK as an example, and go back to 2021 when inflation started to surge, we saw that inflation started the year at 0.7% and ended at 5.4% with the inflation rate not above the 2% target until May. It might have seemed in May that there was nothing for the BoE to be concerned about. Indeed, it was not concerned at all, as it did not start to lift rates until December 2021.

However, if we look at the CBI monthly survey that asks firms what they expect to do with their prices in the next three months, nearly 50% planned price hikes by the middle of the year, compared to zero in December 2020. This was a huge rise and clearly foreshadowed a dramatic rise in inflation. This is not to single out the BoE as a bad apple, as the mistake was repeated by others.

The Fed, for instance, seemingly paid no regard to the National Federation of Independent Businesses (NFIB) survey of small firms’ 3-month pricing intentions back in the middle of 2021 when nearly 50% of them said that they planned price hikes compared to around 20% at the start of 2021. And it is not just inflation that is predicted by these sorts of surveys, but disinflation as well.

Why do we mention all this now? It is not because we want to lambast central banks for missing the rise in inflation back in 2021 and 2022. Instead, it is because we want to point out that these surveys have recently started to point to higher inflation in the future. The NFIB survey in the US hit its low point for pricing intentions all the way back in April last year, while the UK CBI survey has started to climb this year.

“What we find notable about the latter is that it seems unlikely to be happening because demand is robust – which is often the excuse used for stubborn inflation in the US. In short, it might be the case that there are new inflationary forces that could be common across many countries and will at least prevent inflation from falling to target levels on a consistent basis. Who knows, these sorts of surveys could be one reason why the Fed is growing more hesitant to cut rates – although we rather doubt it”, Steve Barrow, Head of the Standard Bank G10 Strategy, said.