What’s Behind Firms’ Inflation Forecasts?

24 Pages Posted: 1 Aug 2019

Date Written: October 4, 2018

Abstract

How do firms form expectations about future inflation? We investigate this issue by exploiting the Survey of Inflation and Growth Expectations run by Banca d’Italia and Il Sole 24 Ore on Italian firms. Several sources of information might matter in shaping short- and long-term expectations, inter alia media reports, professional forecasts, personal shopping experience, price increases experienced when dealing with suppliers, and the outcome of contract renewals. The specific feature of the wage setting process in Italy allows us to assess the reaction of inflation expectations to exogenous variation in the cost of labour borne by firms. We find that firms’ inflation expectations are significantly affected by contractual wage increases. As to the prices of goods for own consumption, proxied by house and fuel prices, only the latter affect inflation expectations; official inflation data and professional forecasters expectations are also important. Results are robust to several specifications using panel and cross-section estimates.

Keywords: inflation expectations, survey data, wages

JEL Classification: C23, E24, E31

Suggested Citation

Conflitti, Cristina and Zizza, Roberta, What’s Behind Firms’ Inflation Forecasts? (October 4, 2018). Bank of Italy Occasional Paper No. 465. Available at SSRN: https://ssrn.com/abstract=3429831 or http://dx.doi.org/10.2139/ssrn.3429831

Cristina Conflitti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Roberta Zizza (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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