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

31 Pages Posted: 4 Apr 2015

See all articles by Michael F. Bryan

Michael F. Bryan

Federal Reserve Bank of Cleveland; Federal Reserve Banks - Federal Reserve Bank of Atlanta

Brent Meyer

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Nicholas Parker

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Date Written: January 2015

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 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.

Keywords: inflation; survey inflation expectations; price formation

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

Suggested Citation

Bryan, Michael F. and Meyer, Brent H. and Parker, Nicholas, The Inflation Expectations of Firms: What Do They Look Like, are They Accurate, and Do They Matter? (January 2015). FRB Atlanta Working Paper No. 2014-27a, Available at SSRN: https://ssrn.com/abstract=2580491 or http://dx.doi.org/10.2139/ssrn.2580491

Michael F. Bryan

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101
United States

Federal Reserve Banks - Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Brent H. Meyer (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Nicholas Parker

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

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