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© 2022 International Monetary Fund
WP/22/161
IMF Working Paper
Research Department
Inflation Expectations and the Supply Chain
Prepared by Elias Albagli, Francesco Grigoli, and Emiliano Luttini
Authorized for distribution by Maria Soledad Martinez Peria
July 2022
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.
ABSTRACT: 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.
| JEL Classification Numbers: | E30, E31 |
| Keywords: | Forecast disagreement, inflation expectations, information frictions, Phillips Curve, rational inattention, supply chain |
| Author’s E-Mail Address: | ealbagli@bcentral.cl, fgrigoli@imf.org, eluttini@bcentral.cl. |
| JEL Classification Numbers: | E30, E31 |
| Keywords: | Forecast disagreement, inflation expectations, information frictions, Phillips Curve, rational inattention, supply chain |
| Author’s E-Mail Address: | ealbagli@bcentral.cl, fgrigoli@imf.org, eluttini@bcentral.cl. |
The views expressed in this paper are those of the authors and do not necessarily represent those of the Central Bank of Chile, the IMF, its Executive Board, or its management. Officials of the Central Bank of Chile processed the disaggregated data from the Internal Revenue Service. We thank Héctor Álvarez for the excellent research assistance. We are also grateful to Olivier Coibion, Gita Gopinath, Pierre-Olivier Gourinchas, Jose Mota, Gurnain Pasricha, Carolin Pflueger, Damiano Sandri; and to the participants to the 2022 NBER Conference on Inflation Expectations, the SETA 2022, the Reserve Bank of New Zealand seminar, and IMF seminars for comments and suggestions