Unit Cost Expectations and Uncertainty: Firms' Perspectives on Inflation

Brent Meyer and Xuguang Simon Sheng

No 2021-12b, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

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 and plan for, and which matter for price setting. We document five key findings. First, once aggregated, firms' unit cost realizations closely comove with US 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. Third, we find that up until early 2020, the evolution of firms' views was similar to other survey and market-based measures of inflation uncertainty. Fourth, using 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; uncertainty; unit cost expectations (search for similar items in EconPapers)
JEL-codes: E31 E52 E6 L2 (search for similar items in EconPapers)
Pages: 85
Date: 2024-03-01
New Economics Papers: this item is included in nep-mon
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Published in 2021

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Related works:
Working Paper: Unit Cost Expectations and Uncertainty: Firms' Perspectives on Inflation (2021)
Working Paper: Unit Cost Expectations and Uncertainty: Firms' Perspectives on Inflation (2021)
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DOI: 10.29338/wp2021-12b

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