Brent H. Meyer and Xuguang Simon Sheng
Working Paper 2021-12b
March 2021 (Revised December 2021 and March 2024)

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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.

JEL classification: E6, E31, E52, L2

Key words: inflation expectations, probability distributions, randomized controlled trials, uncertainty, unit cost expectations

This working paper's draft is substantially revised from the last draft. Nicholas Parker participated in past drafts, and the authors thank him for his contribution. A special thanks to Brian Prescott, Emil Mihaylov, and Antar Diallo for providing excellent research assistance. The authors thank the Federal Reserve Bank of Atlanta for its ongoing support of the Economic Survey Research Center (ESRC) and the Business Inflation Expectations (BIE) survey. They remain heavily indebted to Mike Bryan for founding the BIE. They also thank Jose Maria Barrero (discussant), Carola Binder (discussant), Oli Coibion (discussant), Chiara Osbat (discussant), Ewa Stanisawska (discussant), Bernie Andrade, Nick Bloom, Wojtek Charemza, Jon Willis, and participants at FRB-SNB-BIS Global Risk, Uncertainty, and Volatility Conference, the Philadelphia Fed Conference on "Real-Time Data Analysis, Methods, and Applications," 21st IWH-CIREQ-GW Macroeconometric Workshop, 23rd Federal Forecasters Conference, ESCoE Conference on Economic Measurement, 41st International Symposium on Forecasting, IAAE Conference, CEBRA Conference, 35th CIRET Conference, ICEA Conference on Inflation, 49th OeNB Conference on "The Return of Inflation," Cleveland Fed/ECB Conference on "Inflation: Drivers and Dynamics," Stanford Workshop on "The Macroeconomics of Uncertainty and Volatility," and seminars at the Federal Reserve Board, Penn State University, George Washington University, Renmin University of China, and University College Dublin for helpful comments. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Atlanta. All results have been reviewed to ensure that no confidential information was disclosed.

Xuguang Simon Sheng is in the Department of Economics at American University, 4400 Massachusetts Ave. NW, Washington, DC 20016. Please address questions regarding content to Brent H. Meyer, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309.