Firm Level Expectations and Macroeconomic Conditions: Underpinnings and Disagreement

Abundant evidence that the inflation expectations of financial analysts differ in economically important ways from those of non-financial specialists, has been followed by increasing demand for firm level data, in an attempt to more accurately capture the views of price setters. The unusually rich firm level survey data from South Africa allows us to explore some of the ways in which the expectations of firms differ from that those of other groups surveyed. We focus specifically on forecast disagreement, which can offer insights about the level of uncertainty reflected in the data, as well as the degree to which expectations are anchored. We find that divergence of inflation forecasts amongst respondents is partly explained by differences in how respondents believe the broader macroeconomy is evolving. We also consider the impact of different types of aggregation of the data. It is when we construct a new measure of macroeconomic disagreement that combines all the variables being forecast that we are able to see that forecasters responded sharply in early 2020 as the pandemic emerged.