New Evidence on the Surprise Surge in Inflation
Paper Session
Saturday, Jan. 7, 2023 2:30 PM - 4:30 PM (CST)
- Chair: Lena Anayi, Bank of England
Perceived and Expected Rates of Inflation for Firms in the U.S.
Abstract
The seminal work of Jonung (1981) showed that households’ perceptions of inflation are the strongest predictor of households’ inflation expectations. This fact has been a key ingredient for testing and developing theoretical models of how economic agents form expectations (e.g., the famous Lucas island model). However, little is known about whether perceptions play a similar role for firms. Using a new survey of American CEOs, we document that inflation perceptions shape the inflation expectations of firms just as Jonung found for households. Furthermore, perceptions about past inflation predict perceptions of the Fed’s inflation target and uncertainty about future inflation. These results suggest that information rigidities apply not only for households but also for CEOs.Firming up Price Inflation, Expectations and Uncertainty
Abstract
Inflation initially fell during the pandemic, but recent increases have taken it to thirty year highs in both the US and the UK. We use data from a large panel survey of firms to analyse the economic drivers of price setting during the Covid pandemic. We show that inflation responded asymmetrically to movements in demand. This helps to explain why inflation only fell modestly in the first year of the pandemic but picked up strongly in the second year. Firm also report expected price changes which respond strongly to recent realized and future forecast aggregate inflation, consistent with adaptive expectations. Finally, we also introduce a novel measure of inflation uncertainty within firms and show how this has increased during the pandemic, continuing to rise in 2022 even as sales and employment uncertainty dropped back.A Temporary VAT Cut as Unconventional Fiscal Policy via Inflation Expectations
Abstract
We exploit the unexpected announcement of an immediate, temporary VAT cut in Germanyin the second half of 2020 as a natural experiment to study the spending response to unconventional
fiscal policy. We use survey and scanner data on households’ consumption expenditures
and their perceived pass-through of the tax change into prices to quantify its effects. The temporary
VAT cut led to a substantial relative increase in durable spending of 36% for individuals
with a high perceived pass-through. Semi- and non-durable spending also increased. According
to our preferred estimates, the VAT policy increased aggregate consumption spending by 34
billion Euros.
JEL Classifications
- E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- E3 - Prices, Business Fluctuations, and Cycles