By Sam van de Schootbrugge 02-06-2021

Be Careful, Inflation Expectations Are Unanchored!

(6 min read)
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A new NBER working paper shows that existing US surveys of professional forecasters and households poorly proxy firms’ inflation expectations.
Their expectations also appear unanchored, much like households’, displaying significant cross-sectional disagreement and large quarter-on-quarter revisions.
Despite recent research showing inflation expectations matter for firms’ employment and investment decisions, very few are aware of the Fed’s inflation target or inflation over the last 12 months.

Introduction

Most understand that if individuals expect higher inflation, prices will follow suit. This self-fulfilling prophecy comes from firms, households and banks all making forward-looking decisions based on where they believe prices will be. A new NBER working paper analyses the results from a new US firm-based survey of inflation expectations. It finds that:

On average, firms’ inflation expectations are higher than professional forecasters’, and they follow similar dynamics to household expectations.
There is widespread disagreement among firms about short-term and long-term inflation forecasts, which increases in periods of greater economic uncertainty.
Most firms (65%) are ignorant of the Fed’s inflation target. For those that think they know, the average implied a target rate of 2.9%.
Chief executive officers (CEOs) are also unlikely to know the current inflation rate, despite around 40% stating that aggregate inflation matters for their pricing decisions.

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