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Duke CFO Survey: Higher Costs May Last Through 2022

According to results of the fourth-quarter CFO Survey released this week, Chief Financial Officers (CFOs) expect the larger-than-normal cost increases due to historic inflationary pressures that have hit their businesses to last another 10 months or more.

Fewer than 20 percent of the surveyed CFOs expect cost increases to diminish within 6 months. Instead, the majority of them, 60 percent, anticipate that the cost increases will last at least another 10 months, if not into 2023.

Almost 90 percent of the firms surveyed report larger-than-normal cost increases — a sharp rise from the second quarter of 2021.

This CFO survey reveals a more pessimistic outlook compared to economists. Economists had been forecasting closer to average inflation of about 2.7 percent in 2022, down from the expected 6.6 percent at the end of 2021. Higher inflation forecasts may push the Federal Reserve to raise short-term interest rates next year instead of waiting until 2023.

Commenting on the survey results, Atlanta Fed economist Brent Meyer said, “CFOs indicate that these cost pressures are not abating and will likely be with us for some time.

To handle the rising costs, CFOs indicate they are pursuing two strategies. The overwhelming majority, almost 80 percent of firms, are passing on at least some of these cost increases to customers through higher prices. More than a third of the respondents say they are passing through 76 to 100 percent of the higher costs.

A lower percentage of firms report absorbing cost increases, including reducing margins, reducing costs in other areas, eliminating or substituting product offerings, adding contingency clauses into contracts, and turning down work.

Cost pressures and inflation was the second-most pressing concern among CFOs in the fourth quarter, outpaced by the availability and quality of labor. Supply-chain disruptions came in third. Fewer CFOs are concerned about customer demand and tax policies than last quarter.

Still, many firms anticipate employment and revenue growth in 2021 and 2022, accompanied by continuing increases in employees’ wages.

The results of The CFO Survey, a collaboration of Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta, were echoed by the results of the fourth-quarter AICPA Economic Outlook Survey.

The survey of Chief Executive Officers, Chief Financial Officers and Controllers, found that inflation is the top concern, nudging out the limited availability of skilled personnel. The tight labor market is cited as a factor in an anticipated increase in salary and benefit costs, which respondents expect to rise 4.3 percent over the next 12 months, the fastest rate since before the Great Recession, the AICPA said.

The executives’ profit growth expectations are also dropping, with the anticipated growth rate for the next 12 months falling to 2.1percent from 2.5 percent in the third quarter. On the other hand, revenue growth projections are up to 4.7 percent from 4.3 percent, quarter over quarter.

Both surveys showed lagging optimism about the U.S. economy. Asked to rank optimism about the overall U.S. economy on a scale of 0 to 100, CFOs ranked their optimism at 60.3, little changed from the 59.9 reading in the third quarter and down from 69 in June.

Only 41 percent of business executives surveyed by the AICPA expressed optimism in the U.S. economy over the next 12 months, down from 51 percent last quarter and 70 percent in the second quarter.

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