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Regional Matters

February 2, 2024

Are Fifth District Firms Revisiting Their Prices Less Often Amid Cooling Inflation?


The Richmond Fed's monthly business surveys of Fifth District firms gauge regional firm dynamics in pricing. We carefully monitor changes in firms' realized prices as well as their pricing expectations, especially since inflation began to accelerate in 2021 and 2022. Early last year, we examined how firms began to adjust their prices more frequently as firms' price forecasts became less accurate and uncertainty rose, as evidenced by a rising standard deviation of price growth expectations.

As inflation has decelerated in the past year, we have observed similar slowdowns in both realized and expected growth among our surveyed firms. Additionally, the range of firms' expectations for future price growth has narrowed, indicating more agreement and less uncertainty about the future path of firms' price changes. However, despite anticipating slower price growth into the next year, firms are still adjusting their prices more frequently than they did in the pre-pandemic era.

Price Growth in the Fifth District Slowing Toward Pre-COVID-19 Rates

A recent Economic Brief by Felipe Schwartzman and Sonya Ravindranath Waddell explored how firms tended to pay more attention to inflation as it rose in 2021-2022 and correspondingly adjusted their pricing expectations higher. However, the authors found that the effect began to reverse in 2023 amid slowing inflation as firms' price growth expectations descended toward pre-pandemic readings.

National inflation, as measured by the headline personal consumption expenditures (PCE) price index, has moderated from a peak of over 7 percent in June 2022 to 2.6 percent in November 2023. Price changes among Fifth District firms have similarly cooled with the realized average growth rates of prices received falling to 3 percent for manufacturing firms (down from a peak of 13.3 percent in January 2022) and 4.2 percent for services firms (down from a peak of 7.8 percent in December 2022) in December 2023.

Although firms' expectations for year-over-year price growth undershot realized price growth, they still peaked at approximately triple their 2018-2019 averages. However, as of January 2024, expected growth rates have declined from 6 percent in early 2022 to 3.6 percent for services firms and 1.6 percent for manufacturing firms.

Expected Price Growth Is Becoming Less Volatile Among Our Respondents

The averages of price growth expectations not only shifted upward during the pandemic, but also the ranges of Fifth District firms' price forecasts widened, which perhaps suggested rising uncertainty over the price impact of factors such as supply chain disruptions and labor shortages. The standard deviation of the expected growth of prices received increased, indicating higher dispersion (or disagreement) between firms regarding future price growth. While still higher than pre-pandemic averages, the standard deviation of expected price growth for firms' own prices has continued to shrink from between 4 percent to 5 percent in early 2023 to just above 3 percent by the end of the year, which could reflect lower uncertainty regarding the near-term path of inflation.

Are Firms Revisiting Pricing Decisions Less Frequently?

Increased volatility in price growth expectations may lead firms to adjust their prices more often. Since our post last March, volatility in price growth expectations has declined, but it is still above pre-COVID-19 levels. In our December survey, we asked firms again how often they adjusted their prices in 2023, as well as their expectations for price adjustments in 2024. We found that firms decreased the frequency that they adjusted their prices in 2023 compared to 2022. Sixty-seven percent of manufacturing firms and 68 percent of services firms adjusted their prices at most twice in 2023, compared to 62 percent and 64 percent in 2022, respectively. When asked about their expectations for 2024, manufacturing firms expect a similar frequency of price adjustments as 2023, whereas services firms expect slightly fewer price adjustments. Nevertheless, the frequency of price adjustments this year is expected to remain above pre-COVID-19 levels.

Firms Anticipate Price Growth to Stay Above COVID-19 Levels

Our December survey also indicates that some firms do not expect price growth to return to pre-pandemic levels in the next year. We asked firms to compare expected 2024 price growth to before COVID-19. Half of manufacturing firms and 62 percent of services firms expect annual price growth to be above pre-COVID-19 norms. Only 17 percent of manufacturing firms and 3 percent of services firms expect annual price growth to be lower than before the pandemic.

Closing Thoughts

Every month, we ask firms in our monthly business surveys to provide information about their realized and expected annual growth rates of prices. Data from these questions provide valuable insights into the actual and expected trajectory of price growth across our region. While Fifth District firms told us they expect price growth to decline over the next 12 months, a majority expect annualized growth to be above pre-COVID-19 norms. Additionally, firms expect to adjust their prices more frequently than before the pandemic, suggesting that pricing uncertainty persists. We will continue to monitor our region's economy to assess the evolving landscape of firms' pricing decisions.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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