Do Firms Expect Persistent Pricing Pressures — And Does Automation Make a Difference?

Over the last year, inflation has eased meaningfully from its post-pandemic peak, but it has remained above the Federal Open Market Committee's 2 percent target. This occurred despite a persistently strong labor market with robust job growth and unemployment near 4 percent. At the same time, a proliferation of news articles about the pervasiveness of automation and artificial intelligence, along with studies about their impact on jobs and wages, motivated us to examine whether automation has helped firms offset pricing pressures, including through lower labor costs.

In the most recent CFO Survey, we explore expectations for pricing pressures by asking financial leaders nationwide for their anticipated growth in prices in 2024, and how this compares to pre-pandemic growth rates. We find that most CFOs expect pricing pressures to remain elevated through at least 2024. We also asked about the adoption of automation, and find that on average, firms experiencing above-normal price growth and implementing automation expect slower price growth both this year and next year compared to their non-automating peers.

Firms Expect Pricing Pressures to Persist During 2024

The combination of higher input costs and wages in the aftermath of the COVID-19 pandemic led to higher price growth. While growth in unit costs, wages, and prices has moderated from their peaks in 2021 and 2022, price expectations among surveyed financial leaders are not back to their pre-pandemic levels, suggesting that pricing pressures may be more persistent than initially thought.

CFOs also reported they remain concerned about price growth. Monetary policy was listed as the top concern among CFOs, though nearly as many cited cost pressures and inflation, as well as hiring and retaining qualified employees. The fact that concerns about cost pressures and inflation remain so prominent — and even increased in the most recent quarter — supports the notion that pricing pressures remain a key concern even though inflation has moderated.

To better understand whether CFOs expect pricing pressures to return closer to normal during 2024, The CFO Survey asked firms to compare their 2024 expected annual growth in prices — specifically, the price of the product/product line or service responsible for the largest share of their firm’s domestic revenue — to growth rates prior to the COVID-19 pandemic. For the past three quarters, nearly 60 percent of respondents expect growth in prices during 2024 to remain higher than pre-pandemic price growth.

Pricing Pressures: What Role for Automation?

In our most recent CFO Survey, we asked firms whether they adopted labor-replacing automation in the last 12 months and their motivations for doing so. These results, combined with information from our core survey module on price growth expectations, allow us to gain further insight on the relationship between automation and firms' pricing behavior.

Around 60 percent of all firms, and nearly 85 percent of large firms, implemented automation over the last 12 months. Firms that automated over the last 12 months experienced faster price growth last year but anticipate slower price growth in 2024 and 2025 relative to their non-automating peers. One possible explanation is that firms experiencing elevated growth in prices and wages may have sought to automate as a means of cost reduction. Interestingly, the typical automating firm anticipates a near-immediate payoff in terms of slower price growth. In stark contrast, firms that did not engage in automation see rising price pressures for this year and next year.

Of equal interest is the segment of the panel experiencing above-normal price growth during 2024. For this category of firms, average price growth for both automating and non-automating firms is higher than their "all firms" counterpart (which is reassuring from a survey practitioner's point of view). Importantly, we notice a similar differential between the expected price growth of automating and non-automating firms. In other words, firms that have recently engaged in automation anticipate slower price growth than their non-automating counterparts across several dimensions of the data.

Conclusion

The Q2 CFO Survey indicates that most firms expect price growth to remain "above normal" this year (relative to pre-COVID-19). However, we identify a notable divergence among respondents: Firms that implemented automation over the last 12 months expect slower price growth than non-automating firms. Time will tell whether the bifurcation of price growth expectations by automation status is borne out, and whether automating firms return to "normal" price growth more quickly than their non-automating peers.