Dive Brief:

• The proportion of CFOs grappling with high production costs has surged, and the extreme price pressures have prompted them to trim forecasts for economic growth, according to a third-quarter survey by the Richmond Federal Reserve and Duke University’s Fuqua School of Business.
• “The share of firms with abnormally large increases in the majority of their costs doubled since the second quarter of last year” to 52%, according to Brent Meyer, an Atlanta Fed economist. “More than 80% of firms expect cost pressures to persist into next year and around a third expect these pressures to last longer than a year.”
• At the same time, the portion of CFOs optimistic about their companies’ prospects — while far lower than last year — held steady amid expectations that revenue, employment and cost pressures will improve, according to the survey of CFOs at 1,306 companies in 14 industries from Aug. 24 until Sept. 9.

Dive Insight:

CFOs during August faced a 7.3% increase in the core Producer Price Index, excluding volatile food and energy prices, as rising costs for warehousing, transportation and other services suggest that high inflation may be spreading into parts of the economy usually slower to respond to broad price pressures.

At the same time, the core Consumer Price Index rose in August 6.3% on an annual basis compared with 5.9% in both June and July. The increase in core consumer prices spanned several categories, including shelter, medical care, education and automobiles, according to the Labor Department.

“Though the recent inflation data have been disappointing, most forecasters, myself included, anticipate that inflation in the U.S. will cool down substantially over the next couple of years,” Chicago Fed President Charles Evans said Tuesday.

Bottlenecks in supply chains are clearing up, inflation expectations have remained stable, labor market participation should recover as the pandemic recedes and tighter monetary policy will probably reduce demand and ease price pressures, Evans said to a forum in London.

Risks remain, however, Evans said, noting that “disruptions from the Russian invasion of Ukraine and unpredictable COVID-related shutdowns, notably in China, have continued to snarl supply.”

Also, the slowdown caused by the withdrawal of record Fed stimulus “will, unfortunately, cause difficulties for some households and businesses,” Evans said.

The Fed on Sept. 21 intensified its fight against the highest inflation in nearly four decades, raising the benchmark interest rate by 75 basis points for the third straight meeting and pushing up estimates for further increases in borrowing costs through next year. A basis point is one hundredth of a percentage point.

Policymakers lifted the target range for the federal funds rate to 3% to 3.25%. Their median projection showed that they expect to lift the rate to 4.4% by the end of 2022 — a full percentage point above their June estimate — and to 4.6% by the end of next year.

“Inflation is our primary concern,” Evans said, affirming the central bank’s determination to reduce annual price gains to its 2% target. “Reducing inflation is likely to require a sustained period of below-trend growth.”

CFOs identified inflation as their companies’ No. 1 concern, the Richmond Fed said in describing its survey, “and nearly all firms reported experiencing larger-than-normal cost increases.” Labor quality and availability fell during the third quarter to CFOs’ second biggest challenge.

With the Fed raising borrowing costs, the share of CFOs characterizing financing conditions as unfavorable doubled to 15% compared with the second quarter survey. Also, 38% of CFOs cited a need to preserve cash, an increase of 10 percentage points compared with the prior survey.

CFO expectations for economic growth during the next 12 months fell to 0.9% during the third quarter from 1.5% during the second quarter, according to the survey. They assigned a 30% probability of recession during the next 12 months compared with a 21% probability in the second quarter.