Firms are ‘inattentive’ to inflation and monetary policy – NBER paper

US firms have little understanding of monetary policy and their inflation expectations deviate “dramatically” from those of professional forecasters, new research finds.

The working paper, published by the National Bureau of Economic Research, reports the results of a new survey of US firms’ inflation expectations.

Authors Bernardo Candia, Olivier Coibion and Yuriy Gorodnichenko find firms disagree on inflation, revise their expectations frequently and tend to predict inflation significantly above the Federal Reserve’s 2% target, even though inflation has tended to run below the target in recent years.

The findings indicate “that the inflation expectations of US CEOs are anything but anchored”, the authors say.

One factor behind this lack of anchoring may be that firms pay little attention to monetary policy. “We find that most CEOs are unaware of the Federal Reserve’s inflation target,” they say. “The fraction of CEOs that correctly identifies 2% as the inflation target is less than 20%.”

The authors say their survey is the first “consistent real-time measure of firms’ inflation expectations in the US” and could be an “invaluable input” into the policy-making process.