Firm inflation expectations are a key driver of future price growth. This column uses a large economy-wide business survey to understand the response of firms to monthly CPI inflation releases in the UK. Firms' CPI inflation perceptions respond very quickly, in a matter of hours after the CPI release. Expected own-price growth also responds strongly to changes in CPI inflation. Expectations are more responsive to CPI data releases when inflation is high. The results are consistent with several mechanisms, including (i) higher responsiveness when inflation media coverage is elevated, (ii) a desire to maintain relative prices, (iii) recent inflation driven by supply-side shocks, and (iv) an expectation of higher borrowing costs in response to higher inflation.

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6 August 2024

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Vox EU

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https://cepr.org/voxeu/columns/speed-firm-response-inflation

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