Unit Cost Expectations and Uncertainty: Firms' Perspectives on Inflation

63 Pages Posted: 14 May 2021

See all articles by Brent Meyer

Brent Meyer

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Nicholas Parker

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Xuguang Sheng

American University

Date Written: March, 2021

Abstract

We rely on the Atlanta Fed's Business Inflation Expectations survey to draw inference about firms' inflation perceptions, expectations, and uncertainty through the lens of firms' unit (marginal) costs. Using methods grounded in the survey literature, we find evidence that the concept of "aggregate inflation" as measured through price statistics like the consumer price index hold very little relevance for business decision makers. This lack of relevance manifests itself through experiments (including randomized controlled trials) that show how researchers word questions to elicit inflation expectations and perceptions significantly changes firms' responses. Our results suggest firms have become rationally ignorant of the concept of inflation in a low-inflation environment. Instead, we find that unit (marginal) costs are the relevant lens with which to capture firms' views on the nominal side of the economy. We then investigate both firm-level (micro) and aggregated (macro) probabilistic unit cost expectations. On a firm level, unit costs are an important determinant of firms' price-setting behavior. Aggregating across firms' beliefs, firms' unit cost perceptions strongly comove with official aggregate price statistics, and, importantly, firms' expectations for the nominal side of the economy have little in common with the "prices in general" expectations of households. Rather, firms' aggregated beliefs strongly covary with the inflation expectations of professional forecasters and market participants.

JEL Classification: E31, E52

Suggested Citation

Meyer, Brent H. and Parker, Nicholas and Sheng, Xuguang, Unit Cost Expectations and Uncertainty: Firms' Perspectives on Inflation (March, 2021). FRB Atlanta Working Paper No. 2021-12, Available at SSRN: https://ssrn.com/abstract=3843790 or http://dx.doi.org/10.29338/wp2021-12

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

Xuguang Sheng

American University ( email )

4400 Massachusetts Ave, NW
Washington, DC 20016
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
33
Abstract Views
127
PlumX Metrics