Working Paper
How Firms Form Beliefs and the Implications for Inflation
Abstract: Using survey data from U.S. firms, we study the primitive beliefs for pricesetting: firms’ forecasts of their own marginal costs. These forecasts are disconnected from CPI expectations, (over)react to current and past costs systematically, and underreact to aggregate shocks until costs move. We show that under empirically realistic cost beliefs the New Keynesian Phillips curve is steeper and less forward-looking. Supply shocks are more inflationary because they hit costs quickly. Demand shocks are less inflationary because firms fail to anticipate future wage pressure. Forward guidance weakens at long horizons but strengthens in the near term.
https://doi.org/10.17016/FEDS.2026.053
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Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2026-07-31
Number: 2026-053