Overview
The Federal Reserve banks of Richmond and Atlanta, together with Duke University’s Fuqua School of Business, released their latest quarterly survey of chief financial officers this week. Fielded from May 18 to June 5 and covering more than 500 firms across the United States, the poll shows that while inflation remains a dominant concern for finance chiefs, the sharp rise in energy costs tied to the U.S.-backed conflict with Iran last spring did not translate into widespread price hikes or diminished demand for most companies.
Key survey findings
CFOs reported that their expectations for U.S. economic output growth have moderated: the median forecast slipped to 1.8% from 2.1% in the previous quarter’s poll. Despite this weaker view of the broader economy, respondents were somewhat more upbeat about prospects for their own firms compared with the prior survey.
Hiring plans remained broadly unchanged in the latest quarter. Firms on average projected both unit costs and selling prices to increase by roughly 4.7% over the coming year - a projection that the survey notes was premised on oil trading near $90 a barrel. Market prices, however, had fallen after a ceasefire and the reopening of shipping lanes through the Strait of Hormuz.
Corporate response to higher oil prices
When asked about the effect of the spring oil shock, approximately two-thirds of firms said it elevated unit production costs. But only about one-third of companies reported that they actually raised prices in response. More than 70% of respondents indicated demand for their goods and services either remained largely unchanged or increased, suggesting consumer spending patterns were resilient in the face of the energy-driven cost shock.
Brent Meyer, an Atlanta Fed vice president and head of the bank’s survey research, said in an interview that if upward pressure on energy prices has truly ended, then the episode is unlikely to be a sustained inflationary force. He noted that the largest price increases have been concentrated among firms with the greatest direct exposure to oil as an input cost.
Meyer added that if oil futures prove correct and prices settle back in the $70 to $75 a barrel range, that outcome would ease energy’s contribution to inflation over time. He also cautioned, however, that it is premature to draw final conclusions about the war’s economic impact until oil prices clearly remain near current levels. CFOs framed their cost and price expectations on the assumption that oil would stay close to its recent trend, and alternate-scenario questions in the survey suggest firms would pass additional unit-cost increases on to customers on an almost one-for-one basis.
"There’s basically fewer and fewer levers they have left to pull on the cost side before they really are forced to push through price increases," Meyer said, describing how firms' ability to absorb higher input costs is limited.
Inflation, services prices and policy considerations
Some policymakers at the Federal Reserve are worried that inflation remains stubbornly above the central bank’s 2% target for reasons that extend beyond episodic shocks such as oil or one-time increases tied to tariffs. Investors and several large banks have increased their odds that the Fed could resume raising interest rates as soon as the September meeting.
Economists polled expect forthcoming data on the Fed’s preferred inflation gauge - the Personal Consumption Expenditures price index - to show a 4.1% year-on-year increase in May, with the core PCE index excluding energy and other volatile items rising 3.4%. Those core readings would be higher than the previous month and remain well above the central bank’s target.
Service-sector prices, which make up the bulk of U.S. consumer spending, have been climbing at roughly a 3.5% annual pace for more than a year. That rate is about one percentage point higher than was typical in the years prior to the COVID-19 pandemic, a pattern that some Fed officials find particularly worrisome because service inflation historically proves more persistent.
At its most recent policy meeting, the Federal Reserve left its target interest-rate range unchanged. But the new projections released by policymakers showed a notable shift: half of the officials now expect at least one rate hike later this year. All but one of the remaining projections foresee the policy rate staying in the current 3.5% to 3.75% range.
Chicago Fed President Austan Goolsbee commented publicly that the U.S. is still dealing with inflation that is significantly above the target and that the trend has been unfavorable. He acknowledged there are some potentially transitory elements - such as tariff-related price increases and the possibility of a Middle East resolution - that could ease inflation, but he stressed that the strength and persistence of service-sector inflation is a more troubling sign.
Open questions and the path forward
Survey respondents—and Fed analysts—remain mindful of key uncertainties. A central open question is whether the conflict in the Middle East has actually stabilized and, if so, how long it will take for global oil shipments and inventories to return to prewar levels. That timeline will influence whether the energy-driven episode proves short-lived or whether it feeds into a more persistent inflation backdrop.
Within firms, the survey indicates limits to cost absorption. While many companies managed to avoid large-scale price increases this spring, the responses to alternative oil-price scenarios suggest that further sustained input-cost increases would be passed on to customers at near full measure. That dynamic, coupled with persistent service inflation, underpins continued concern among policymakers and market participants over the durability of the disinflationary trend.
Methodology note: The survey covered more than 500 U.S. firms and was fielded from May 18 to June 5 by the Federal Reserve banks of Richmond and Atlanta in partnership with Duke University’s Fuqua School of Business.