What’s Behind Firms’ Inflation Forecasts?

Abstract

How do firms form expectations about future inflation? We investigate this issue by exploiting the Survey of Inflation and Growth Expectations run by Banca d’Italia and Il Sole 24 Ore on Italian firms. Several sources of information might matter in shaping short- and long-term expectations, inter alia media reports, professional forecasts, personal shopping experience, price increases experienced when dealing with suppliers, and the outcome of contract renewals. The specific feature of the wage setting process in Italy allows us to assess the reaction of inflation expectations to exogenous variation in the cost of labour borne by firms. We find that firms’ inflation expectations are significantly affected by contractual wage increases. As to the prices of goods for own consumption, proxied by house and fuel prices, only the latter affect inflation expectations; official inflation data and professional forecasters expectations are also important. Results are robust to several specifications using panel and cross-section estimates.