More than a year after concerns about skyrocketing oil prices and Hurricane Katrina raised fears about inflation, 40 percent of executives around the world still anticipate that the rate of inflation in their countries will rise by at least one percentage point over the next year, according to the latest McKinsey global survey.1 Executives continue to see energy prices and real estate as the primary drivers of higher inflation, but strong demand for goods and services has become an increasing concern.
Overall, half of executives around the world expect inflation to increase in their countries over the next year. Respondents’ perceptions of how high inflation will go, as well as the factors driving it and whether they will be able to raise prices in response, vary widely by region, however.
Globally, perceptions about inflation have eased a bit since our survey in November 2005, when nearly half of our sample believed that it would rise by at least one percentage point in the ensuing year. But expectations vary widely within the developing world (Exhibit 1) and are particularly strong in China, where 19 percent of respondents—nearly three times the global average—believe inflation in their country will increase by at least three percentage points. In India the share of respondents expecting their countries’ inflation rate to rise by at least three percentage points at the end of one year remains below the global average, at some 6 percent.2
Overall, executives continue to see higher energy prices as the main driver of inflation (Exhibit 2); energy was also the top concern in our November 2005 survey. Interestingly, the tightening of the job market has moved down the scale of the main drivers of inflation, from the number three spot to number six, with strong demand for goods and services rising to third place.
But executives’ concerns are somewhat different in the Asia-Pacific region and in developing countries (Exhibit 3). Among respondents in the Asia-Pacific region, China, and India, rising real-estate prices outrank every other factor said to be contributing to inflation; more than two-thirds of them cite this category as their main concern. And more than half of those surveyed in Latin America say strong demand for goods and services will be the main driver of inflation.
Respondents’ views of their ability to raise prices also vary significantly, though not always in line with their expectations for inflation. Only a third of all respondents, for example, say they will have more power to raise prices a year from now, while 46 percent say they don’t expect to have more power (Exhibit 4). Half of respondents in North America, for example, do not expect to have more power to raise prices. Yet in both China and India, at least 45 percent of respondents do anticipate a gain in pricing power over the next year.
Executives around the world face inflationary pressures and constraints on their ability to increase prices. At least half of respondents in Europe, Latin America, and North America anticipate no more power to increase prices than they had one year ago. On the other hand, respondents in China and India—where both domestic demand and exports continue to grow—do foresee greater flexibility to raise prices, regardless of their views on inflation. 
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