Inflation Expectations and the Supply Chain

Author/Editor:

Elías Albagli ; Francesco Grigoli ; Emiliano Luttini

Publication Date:

August 12, 2022

Electronic Access:

Link to Table of Contents

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

We show that firms rely on price changes observed along their supply chain to form expectations about aggregate inflation, and that these expectations have a complete pass-through to sales prices. Leveraging a unique dataset on Chilean firms merging expectation surveys and records from the VAT and customs registries, we document that changes in prices at which firms purchase inputs inform their forecasts of the economy’s inflation. This is the case even if changes in input costs do not determine the inflation outcome. These findings reject the full-information rational-expectations hypothesis and are consistent with firms’ disagreement about future inflation and inattention to macroeconomic news, which we document for Chile. Our results from a firm-level Phillips’ curve estimation suggest that firms’ beliefs about inflation are a key determinant for their price-setting decisions. Therefore, we argue that the channel we highlight in this paper has the potential to lead to dispersion in inflation expectations, price dispersion, and weaken the expectation channel of policies.

Series:

Working Paper No. 2022/161

Subject:

Frequency:

regular

English

Publication Date:

August 12, 2022

ISBN/ISSN:

9798400214752/1018-5941

Stock No:

WPIEA2022161

Pages:

43

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