New survey results suggest business inflation expectations are not well-anchored

 

A new survey of inflation expectations suggests that there is a large difference between professional forecasters, consumers, and business inflation forecasts. The professionals have well-anchored expectations while consumers and businesses have expectations that can change rapidly. In a low inflation world, this may not matter, but in the current environment, the impact of changing inflationary expectations can have a real economic effect unforeseen from focusing on professionals. 

Recent inflation surveys suggest that businesses are not well-informed about inflation and monetary policy. Businesses engage in large revision of their expectations. They are not well anchored around the Fed target of 2%. CEO do not seem well-informed about monetary policy or inflation. They have a high level of inattention. They also show more disagreement than professional forecasters albeit less than households. See “The Inflation Expectations of US firms: Evidence from a New Survey”. 

If this is all true, the real effects of a rise in inflation may be much stronger than expected. The Fed focusing on financial professional may have discounted the behavior of consumers and businesses who change expectations and behavior quicker than generally perceived. If expectations are more sensitive, inflation impacts will become more severe. Of course, if the Fed is right about transitory inflation, expectations may also adjust quickly. Nevertheless, any inattention to inflation may change rapidly and this will have real effects on pricing and profit margins.