Firms’ Inflation Expectations: New Evidence from France

Using a new survey of firms’ inflation expectations in France, we provide novel evidence about the measurement and formation of inflation expectations on the part of firms. First, French firms report inflation expectations with a smaller, but still positive, bias than households and display less disagreement. Second, we characterize the extent and manner in which the wording of questions matters for the measurement of firms’ inflation expectations. Third, we document whether and how the position of the respondent within the firm affects the provided responses. Fourth, because our survey measures firms’ expectations about aggregate and firm-level wage growth along with their inflation expectations, we are able to show that expectations about wages are even more condensed than firms’ inflation expectations and almost completely uncorrelated with them, indicating that firms perceive little link between price and wage inflation. Finally, an experimental treatment indicates that an exogenous change in firms’ inflation expectations has no effect on their aggregate wage expectations.

Using a new survey of firms’ inflation expectations in France, we provide novel evidence about the measurement and formation of inflation expectations on the part of firms. First, French firms report inflation expectations with a smaller, but still positive, bias than households and display less disagreement. Second, we characterize the extent and manner in which the wording of questions matters for the measurement of firms’ inflation expectations. Third, we document whether and how the position of the respondent within the firm affects the provided responses. Fourth, because our survey measures firms’ expectations about aggregate and firm-level wage growth along with their inflation expectations, we are able to show that expectations about wages are even more condensed than firms’ inflation expectations and almost completely uncorrelated with them, indicating that firms perceive little link between price and wage inflation. Finally, an experimental treatment indicates that an exogenous change in firms’ inflation expectations has no effect on their aggregate wage expectations.

Using microdata from the European Consumer Survey (CES) for 11 European countries and 53 months, we investigate the formation and heterogeneity of inflation expectations as well as their theory consistency with the Phillips curve in the euro area, and across countries and demographic groups. We examine how individuals in the euro area form their inflation expectations. Our findings show that people place significant weight on their current perception of inflation. Past experiences with prices also play a role, though to a lesser extent. Importantly, the formation of expectations tends to be forward-looking rather than backward-looking. A similar pattern emerges when we analyze the consistency of these expectations and perceptions with the Phillips Curve theory. Individuals in the euro area generally do not hold theory-consistent expectations regarding inflation. We find notable variations across gender, age, income, education level, household size regarding the formation of inflation expectation.

The inflation expectations of individuals who lead firms can influence the prices that their firms charge customers and hence can influence overall inflation. This Economic Commentary summarizes results from the Survey of Firms’ Inflation Expectations (SoFIE), which asks top business executives for their inflation expectations once per quarter alongside a second question from a rotating set. We document that this group’s inflation expectations increased with the run-up in inflation over 2021 and 2022 but then began to decline in early 2023. The Cleveland Fed will post estimates from the Survey of Firms’ Inflation Expectations each quarter, available via clefed.org/SoFIE.

We provide new insights on the formation of inflation expectations - in particular at a time of great financial and economic turmoil - by evaluating results from a survey conducted from July 2009 through July 2010. Participants in this survey answered a weekly questionnaire about their short-, medium- and long-term inflation expectations. Participants received common information sets with data relevant to euro area inflation. Our analysis of survey responses reveals several interesting results. First, our evidence is consistent with long-term expectations having remained well anchored to the ECB's definition of price stability, which acted as a focal point for long-term expectations. Second, the turmoil in euro area bond markets triggered by the Greek fiscal crisis influenced short- and medium-term inflation expectations but had only a very small impact on long-term expectations. By contrast, longterm expectations did not react to developments of the euro area wide fiscal burden. Third, participants changed their expectations fairly frequently. The longer the horizon, the less frequent but larger these changes were. Fourth, expectations exhibit a large degree of timevariant non-normality. Fifth, inflation expectations appear fairly homogenous across groups of agents at the shorter horizon but less so at the medium- and long-term horizons.

We provide new insights on the formation of inflation expectations - in particular at a time of great financial and economic turmoil - by evaluating results from a survey conducted from July 2009 through July 2010. Participants in this survey answered a weekly questionnaire about their short-, medium- and long-term inflation expectations. Participants received common information sets with data relevant to euro area inflation. Our analysis of survey responses reveals several interesting results. First, our evidence is consistent with long-term expectations having remained well anchored to the ECB's definition of price stability, which acted as a focal point for long-term expectations. Second, the turmoil in euro area bond markets triggered by the Greek fiscal crisis influenced short- and mediumterm inflation expectations but had only a very small impact on long-term expectations. By contrast, long-term expectations did not react to developments of the euro area wide fiscal burden. Third, participants changed their expectations fairly frequently. The longer the horizon, the less frequent but larger these changes were. Fourth, expectations exhibit a large degree of time-variant non-normality. Fifth, inflation expectations appear fairly homogenous across groups of agents at the shorter horizon but less so at the medium- and long-term horizons.

The Bank of Russia uses monthly InFOM survey data to provide a quick estimate of household inflation expectations. A more complete picture of the interrelationships between inflation expectations and the consumer and financial behavior of individuals can be derived from data in the fifth iteration of the Russian National Household Survey of Consumer Finance (Survey of Household Finance — SHF), which for the first time included questions about inflation expectations. This paper compares the results of these surveys, analyzes the reasons for variation of inflation expectations in the SHF, and studies possible ways in which these expectations influence individual behavior. Comparison of the InFOM and SHF data shows that the amount of inflation expected by various socio-demographic groups in the SHF is always higher than in the InFOM survey. However, the inflation expectations in these surveys are not otherwise uniform. Such factors as socio-demographic characteristics, financial situation, perceptions of economic conditions, and the financial literacy of members in a household are the main factors that cause inflation expectations to differ. For example, lower inflation expectations are more typical for young people with higher income and greater financial literacy. The SHF respondents’ decisions about consumption and acquisition of financial assets are nevertheless quite rational. Those who expect higher inflation tend to spend more and at a faster pace while saving less. The results obtained here constitute another argument for maintaining price and financial stability as well as for increasing the financial literacy of the population.

This paper investigates how inflation expectations of individuals are formed in India. We investigate if the news on inflation plays a role in the formation of inflation expectations following the epidemiology-based work by Carroll (Q J Econ 118(1):269–298, 2003). The standard literature on this topic considers news coverage by the print and audio-visual media as the sources of formation of inflation expectations. Instead, we consider the Internet as a potential common source of information based on which agents form their expectations about future inflation. Based on data extracted from Google Trends, our results indicate that during the period 2006–2018, the Internet has indeed been a common source of information based on which agents have formed their expectations about future inflation, and the Internet search sentiment has had some impact on inflation expectations. Additionally, based on the inflation expectations series derived from the Google Trends data, we find that there is presence of “information stickiness” in the system since only a small fraction of the population update their inflation expectations each period.

Over the past decade increasing use has been made of direct information on price expectations in empirical studies of the expectations formation process. In the United States, Livingston's inflation expectation series have been extensively analysed by Turnovsky (I970), Turnovsky and Wachter (I972), Pesando (I975), McGuire (I976), Carlson (I977), Mullineaux (I978, I980), Jacobs and Jones (I980), Figlewski and Wachter (I98I) and others. In the United Kingdom, the general public expectations of consumer prices made available in the Gallup polls have been studied by Carlson and Parkin (I975), Holden and Peel (I977), Smith (I982), Severn (1983) and Evans and Gulamani (I984). Similar studies have also been carried out with respect to surveys conducted in Germany, France and most other OECD countries. However, despite the apparent importance of businessmen's expectations for the understanding of the inflationary process, the empirical research on inflation expectations in the United Kingdom has been mainly concerned with the consumers' price expectations.' The present paper is an attempt to rectify this shortcoming by extending the empirical analysis of the inflation expectation process to British manufacturing industries using the results of the industrial trend surveys conducted by the Confederation of British Industries (CBI). The plan of the paper is as follows: Section I deals with the methodological problems of deriving quantitative inflation expectations series from qualitative responses such as the ones reported in the CBI surveys. The subjective probability method due to Theil, Carlson and Parkin, and the regression method recently proposed by the author (Pesaran, I984) for the conversion of categorical responses to quantitative measures are briefly discussed. Section II sets out the alternative models of inflation expectations formation. Section III describes the data on inflation expectations in British manufacturing industries, and discusses the forecasting value of alternative measures of inflation expectations. Section IV focuses on the issue of measurement errors in expectations and the econometric problems involved. Section V reports the results of estimation of alternative models of inflation expectations, and investigates the quantitative impact of government policy and general economic conditions on inflation

Modeling heterogeneous inflation expectations: empirical evidence from demographic data?

This research highlights the role played by the media in the formation of inflation expectations among various respondents in Ukraine. Using a large news corpus and machine-learning techniques, I have constructed newsbased metrics that produce quantitative indicators for texts, which show if the news topics are relevant to inflation expectations. I have found evidence that various news topics may have an impact on inflation expectations, and can explain part of their variance. Thus, my results could help in the analysis of inflation expectations – which is of value, given that anchoring inflation expectations remains a key challenge for central banks.

This paper analyses the impact of the monetary regime change from the Bundesbank to the ECB in 1999 on inflation expectations. In the theoretical part, the Barro-Gordon model is used to derive the potential effect of a new central bank on inflation, inflation expectations and forecast errors. The econometric investigation is based on a flexible specification of expectation formation which allows both for rational and adaptive elements. Data on inflation expectations originate from the ZEW Financial Market Survey. The results indicate that the monetary regime change did not have a strong and lasting impact on the formation of inflation expectations and that the anti-inflationary credibility of both central banks is not perceived to differ significantly. However, the analysis also reveals that the years immediately before the start of EMU were characterised by a relatively large degree of uncertainty: in this time, market participants resorted to backward-looking expectations even more than usually. This is a plausible result because of the intitial uncertainty about the new central bank's characteristics. Once in charge of monetary policy the ECB was quickly successful to restore certainty about its true Bundesbank-like type.

Does fiscal stance affect inflation expectations? Evidence for European economies

This paper analyses the impact of the monetary regime change from the Bundesbank to the ECB in 1999 on inflation expectations. In the theoretical part, the Barro-Gordon model is used to derive the potential effect of a new central bank on inflation, inflation expectations and forecast errors. The econometric investigation is based on a flexible specification of expectation formation which allows both for rational and adaptive elements. Data on inflation expectations originate from the ZEW Financial Market Survey. The results indicate that the monetary regime change did not have a strong and lasting impact on the formation of inflation expectations and that the anti-inflationary credibility of both central banks is not perceived to differ significantly. However, the analysis also reveals that the years immediately before the start of EMU were characterised by a relatively large degree of uncertainty: in this time, market participants resorted to backward-looking expectations even more than usually. This is a plausible result because of the intitial uncertainty about the new central bank's characteristics. Once in charge of monetary policy the ECB was quickly successful to restore certainty about its true Bundesbank-like type.

Inflation expectations of firms affect their micro-decision-making behaviors and therefore impact the macro-economy. Thus, a deep understanding of how firms form inflation expectations benefits the achievement of central bank’s policy objectives on macro-economic sustainability and development. In this paper, we focus on the inflation expectations of firms from surveys. Specifically, the Naïve Expectation, Adaptive Expectation, Rational Expectation, VAR, and Heterogeneous Static Expectation formation models are adopted to test the models being used by firms to form inflation expectations. Empirically, this paper reveals the heterogeneity between the formation mechanisms of households and firms. Then, empirical results reject the rational expectation hypothesis of firms’ inflation expectations, which means that they are not perfectly rational. Finally, we find that the inflation perception is a non-negligible factor in forming firms’ inflation expectations. Therefore, central banks’ monetary policies that aiming to formulate firms’ inflation perceptions can be a useful tool in regulating their inflation expectations, which are expected to benefit the stability of the macro-economy.