Unit cost expectations: Firms’ perspectives on inflation

Brent H. Meyer and Xuguang Simon Sheng

European Economic Review, 2025, vol. 174, issue C

Abstract: We propose a novel survey-based measure of nominal marginal cost expectations held by business decision makers to track building inflationary pressures and augment the existing set of inflation expectations data policymakers frequently monitor. Unlike other surveys of firms or households that elicit “aggregate” expectations, we focus on idiosyncratic costs that firms are well-aware of, plan for, and matter for price setting. We document four key findings. First, once aggregated, firms’ unit cost realizations closely comove with U.S. inflation statistics. Second, in aggregate, firms’ unit cost expectations significantly outperform households’ inflation expectations when inflation is low and are at least as accurate as the expectations of professional forecasters in out-of-sample forecasting exercises in high and low inflation environments. Third, utilizing special questions, we find evidence that information treatments about aggregate inflation and policymakers’ forecasts do little to alter firms’ unit cost expectations. And, lastly, we show that unit costs, at the firm level, are an important determinant of their own price setting behavior.

Keywords: Inflation expectations; Probability distributions; Randomized controlled trials; Unit cost expectations (search for similar items in EconPapers)
JEL-codes: E31 E52 E6 L2 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:174:y:2025:i:c:s0014292125000066

DOI: 10.1016/j.euroecorev.2025.104955

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