The Heterogeneity of the Inflation Expectations of Italian Firms along the Business Cycle

We investigate how the cross-sectional heterogeneity of firms' inflation expectations reflects information availability and awareness of recent macroeconomic developments, observable firm characteristics, and broader macroeconomic developments using the Bank of Italy's survey on businesses' inflation and growth expectations. We find that, on average, about half of the dispersion of expectations is traceable to a lack of information about the most recent price developments; firms incorporate new information into their expectations within a quarter; the dispersion of expectations is related in a statistically significant way to some important aggregate economic variables, and it is greater when current inflation is farther away from the ECB's price stability goal. Since 2015 the weight attributed to prior beliefs of low inflation has steadily increased and the uncertainty surrounding them has decreased. Furthermore, since 2014 the empirical connection between the dispersion of expectations and the distance from the ECB price stability goal has become considerably weaker. These two facts suggest an increased risk of inflation expectations being de-anchored.