The Inflation Expectations of Firms: What Do They Look Like, are They Accurate, and Do They Matter?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: The purpose of this paper is to answer the three questions in the title. Using a large monthly survey of businesses, we investigate the inflation expectations and uncertainties of firms. We document that, in the aggregate, firm inflation expectations are very similar to the predictions of professional forecasters for national inflation statistics, despite a somewhat greater heterogeneity of expectations that we attribute to the idiosyncratic cost structure firms face. We also show that firm inflation expectations bear little in common with the "prices in general" expectations reported by households. Next we show that, during our three-year sample, firm inflation expectations appear to be unbiased predictors of their year-ahead observed (perceived) inflation. We demonstrate that firms know what they don't know-that the accuracy of firm inflation expectations are significantly and positively related to their uncertainty about future inflation. And lastly, we demonstrate, by way of a cross-sectional Phillips curve, that firm inflation expectations are a useful addition to a policymaker's information set. We show that firms' inflation perceptions depend (importantly) on their expectations for inflation and their perception of firm-level slack. The purpose of this paper is to answer the three above questions. Using a large, monthly survey of businesses, we investigate the in ‡ation expectations and uncertainties of …rms. We document that, in the aggregate, …rm in ‡ation expectations are very similar to the predictions of professional forecasters for national in ‡ation statistics, despite a somewhat greater heterogeneity of expectations that we attribute to the idiosyncratic cost structure …rms face. We also show that …rm in ‡ation expectations bear little in common with the "prices in general" expectations reported by households. Next we show that, over our threeyear sample, …rm in ‡ation expectations appear to be unbiased predictors of their year-ahead observed (perceived) in ‡ation. We also show that …rms know what they don't know-that the accuracy of …rm in ‡ation expectations are signi…cantly and positively related to their uncertainty about future in ‡ation. And lastly, we demonstrate, by way of a cross-sectional Phillips-curve, that …rm in ‡ation expectations are a useful addition to a policymaker's information set. We show that …rms' in ‡ation perceptions depend (importantly) on their expectations for in ‡ation and their perception of …rm-leve...

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