A0838
Title: Unit cost expectations and uncertainty: Firms' perspectives on inflation
Authors: Xuguang Simon Sheng - American University (United States) [presenting]
Brent Meyer - Federal Reserve Bank of Atlanta (United States)
Nicholas Parker - Federal Reserve Bank of Atlanta (United States)
Abstract: Relying on the Atlanta Fed's Business Inflation Expectations Survey, inference about firm's inflation perceptions, expectations, and uncertainty through the lens of firms' unit (marginal) costs is drawn. Using methods grounded in the survey literature, we find evidence that the concept of ``aggregate inflation'' as measured through price statistics like the Consumer Price Index (CPI) hold very little relevance for business decision-makers. This lack of relevance manifests itself through experiments (including randomized controlled trials) that show varying question-wording researchers use to elicit inflation expectations and perceptions significantly changes firm's responses. The results suggest firms have become rationally ignorant of the concept of inflation in a low inflation environment. Instead, we find that unit (marginal) costs are the relevant lens with which to capture firms' views on the nominal size of the economy.
