Working Paper

Unit Cost Expectations and Uncertainty: Firms' Perspectives on Inflation

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;

JEL Classification: E6; E31; E52; L2;

https://doi.org/10.29338/wp2021-12b

Status: Published in 2021

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2024-03-01

Number: 2021-12b