Inflation Expectations of Fifth District Firms

Introduction

In early 2021, inflation in the U.S. began to climb, with the Consumer Price Index (CPI) peaking at 9 percent on a year-over-year basis in 2022. Since then, inflation has come down considerably. In July 2021, we started to monitor the inflation expectations of respondents to our Fifth District business surveys. We saw expectations rise along with inflation and then start to fall.

In the most recent April survey, we find that most firms are following inflation. Firms' expectations for CPI growth in the next year and the next five years have increased again to levels similar to October 2023. However, in spite of reports that recent developments in trade and tariff policy have begun increasing the prices that businesses pay for inputs — some of which they expect to pass through to the prices they charge customers — firms' forecasts do not appear to correspond to their level of international exposure. In other words, firms expect increased inflation whether or not they are likely to be directly exposed to tariffs.

Most Firms Pay Attention to Inflation

As part of our quarterly survey on inflation expectations, we ask firms how closely they follow inflation. The share that follow inflation very closely peaked in July 2022, around the time that CPI growth peaked, and has come down since. Still, in April 2025, about 86 percent of firms reported following inflation somewhat or very closely, suggesting that it is still on the minds of respondents as they navigate their economic environment.

Firms Expect Higher Inflation

In April, respondents to our Fifth District Business Surveys reported elevated growth in the prices they pay suppliers and in the prices they charge customers. Firms also reported that they expect cost growth to increase further over the next 12 months. Higher realized and expected cost growth was particularly acute among manufacturers. Paired with evidence from our February surveys that more than 75 percent of firms expected to pass along some or most of any unexpected cost increase, perhaps it is no surprise that firms' inflation expectations have increased. As one service-sector firm put it, "Inflation on construction materials, trades, and wages impact our consumers as we must pass it on."

When asked what they think the inflation rate will be, firms increased their 12-month and five-year CPI growth expectations to an average of 4.3 percent and 3.7 percent, respectively. These readings are comparable to those from our October 2023 survey, when realized CPI inflation was 3.2 percent. They also mark a reversal of the flat or slightly downward trend in inflation expectations that we have seen since 2023.

Do Inflation Expectations Depend on Firms' International Exposure?

It is no surprise that tariffs are a source of concern for firms. But are the firms that are directly exposed to tariffs driving the increase we see in inflation expectations? To get a sense of the impact that international exposure may have on firms' expectations for inflation, we look at respondents' 12-month and five-year inflation expectations by the share of inputs they source from abroad and the share of outputs they sell abroad.

While there are small differences in inflation expectations by the share of inputs firms get from abroad, there is no clear indication that the more firms import, the higher their inflation expectations. Furthermore, even firms that source all their inputs domestically reported heightened inflation expectations.

The same is true for firms that sell abroad. While firms that sell some of their outputs abroad expected higher inflation in the next year, firms that only sell domestically expected higher inflation in the next five years. Both groups expected higher inflation than they have in the last few quarters.

Conclusion

Data from our April business surveys suggest that firms are continuing to monitor inflation and expect it to rise. Many firms cited developments in trade policy as a driving force behind this increase, although even businesses not directly affected by tariffs have increased their inflation expectations. Many businesses noted the continued uncertainty. As one respondent explained, "Providing an estimated inflation rate given the current environment is beyond a guess. It is comparable to throwing a dart in the direction of a dart board while blindfolded." Heightened uncertainty makes it more important than ever to continue to monitor inflation expectations among Fifth District businesses.

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.