New information and inflation expectations among firms

BIS Working Papers  |  No 781  | 
18 April 2019



We study how firms form inflation expectations in an environment of relatively high and volatile inflation, as is the case of many developing economies. This is in contrast to previous studies that focus on developed countries.


Survey data on firms' inflation expectations are scarce, despite the role of firms as price setters. We first provide evidence on how firms form their inflation expectations and how this is affected by the acquisition of new information, focusing on Uruguay - a country with a history of high and volatile inflation. Second, we provide evidence on how inflation prospects are affected by the acquisition of information about past inflation.


We show that firms generally have persistent forecast errors, that many firms do not revise their expectations frequently and that there is substantial disagreement about future inflation across firms. Looking at firm characteristics, we find that small firms' forecast errors and disagreement about future inflation are larger than those of medium and large firms, and that there is variation in 12-month ahead inflation and average forecast errors across industrial sectors. Our results also suggest that in the months of wage adjustment, on average, firms that adjust their wages expect future inflation to be lower than those that do not adjust wages. We also show that firms' inflation forecasts are more accurate and that there is less disagreement across firms about future inflation at the time of wage adjustments. All these results indicate that the acquisition of information by firms affects their beliefs about future inflation.



Using data from a unique and novel monthly firm-level survey on inflation expectations in Uruguay we first present stylized facts about the inflation expectation formation process and then show how information acquisition affects firms' inflation expectations. We show that firms' forecasts are close to observed inflation, that a sizable proportion of firms do not revise their expectations, and that there is substantial disagreement about future inflation among firms. We also present evidence on industrial sector effects on inflation forecasts and show that the correlation between inflation expectations and cost expectations increases with the forecast time horizon. We then exploit peculiarities of the collective wage bargaining negotiation mechanism to estimate the impact of acquiring information about past inflation on expected future inflation. Our results imply that firms that adjust wages expect lower inflation, revise their expectations downwards and make smaller forecast errors than firms that do not adjust wages. We find no effect of wage adjustments on firms' own cost expectations and that disagreement among firms is lower in the months of wage adjustment. The latter suggests that inflation expectations tend to converge as firms are more informed about past inflation.

JEL classification: D22, D84, E31

Keywords: inflation expectations, firms' survey, new information