Inflation expectations and the ECB’s perceived inflation objective: Novel evidence from firm-level data

Using a unique experiment on a rich survey of Italian firms, we study how the awareness of the formulation of the ECB’s inflation aim shapes their inflation expectations. By means of a randomized controlled trial we show that, in years of low inflation, such awareness raises firms’ inflation expectations by about 25 basis points at all time horizons, shifting them closer to the ECB’s target. We also document that when there is room for interpretation of an official inflation objective, as in the case of the “below, but close to, 2%” formulation, economic agents have heterogeneous perceptions of that, with the majority of firms indicating values not as close to 2% as intended by the ECB. Consequently, this led firms to anchor their expectations to values lower than the official target. Evidence from firms show that this difficulty in interpreting the “below, but close to, 2%” formulation was tackled by the precise 2% definition of the ECB’s inflation target as announced in July 2021. However, firms paid little attention to this new formulation in the immediate aftermath of its announcement, which calls for further efforts in terms of communication by the central bank in order to reach a broader public.