Global Survey of Business Executives: Inflation and Pricing

Inflation is on the rise; pricing power isn't.

Web exclusive, December 2005

Nearly half of the surveyed executives around the world expect the inflation rate in their countries to rise by at least one percentage point over the next year, while more than half say they won't be able to raise prices. The latest survey reflects the views of executives from 134 countries, across a full range of industries and from companies of all sizes.

Even though oil prices were declining while the survey was in the field, executives see energy costs, which rose sharply earlier this year, as by far the most significant driver of inflation. Rising real-estate costs took second place.

Inflation in the United States is currently 4.3 percent annually, while in the European Union it is 2.5 percent. Among the developed Asia-Pacific economies, Australia's inflation rate is 3 percent, while Japan is slightly deflationary, at -0.3 percent.

The survey respondents' outlook on inflation in developing economies is extremely diverse: a fifth of all executives in those markets expect inflation to fall, while nearly 13 percent??more than double the global average?”believe the rate will rise by three or more percentage points. Respondents from China and India, the two largest developing economies, see inflation rising, though their expectations of how much vary: nearly a third of executives in China say it will increase by at least two percentage points, while 44 percent of respondents in India say they expect inflation to rise by one point or less.

Just under a third of all respondents expect to be able to raise prices during the next year; 59 percent do not anticipate gaining pricing power. Executives from the largest companies (measured by annual revenues) are less likely than those from the smallest to expect that they will be able to charge more for their products. Smaller companies are more likely to compete in niche markets where customers have few choices.

The broader effect of globalization can be seen in the fact that more than twice as many respondents predict that inflation will rise as expect to be able to increase prices. If costs are rising but the ability to raise prices is constrained, companies will face even more pressure to make their operations more efficient and to focus narrowly on profitable markets during the coming year.

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