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

Michael F. Bryan, Brent H. Meyer, and Nicholas B. Parker

Working Paper 2014-27a
December 2014 (Revised January 2015)

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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 also show that firms know what they don’t know—that the accuracy of firm inflation expectations is significantly and negatively 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.

JEL classification: E31, C81, C90, E60, E37

Key words: inflation; survey inflation expectations; price formation


The authors would like to thank Todd Clark, Tomasz Lyziak, and participants at the fifth International Workshop on Central Bank Business Surveys for their constructive comments. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Michael F. Bryan, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8915, mike.bryan@atl.frb.org; Brent H. Meyer, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8852, brent.meyer@atl.frb.org; or Nicholas Parker, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8935, nicholas.parker@atl.frb.org.
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