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How Firms Form Beliefs and the Implications for Inflation

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Abstract

Using survey data from U.S. firms, we study the primitive beliefs for pricesetting: firms’ forecasts of their own marginal costs. These forecasts are disconnected from CPI expectations, (over)react to current and past costs systematically, and underreact to aggregate shocks until costs move. We show that under empirically realistic cost beliefs the New Keynesian Phillips curve is steeper and less forward-looking. Supply shocks are more inflationary because they hit costs quickly. Demand shocks are less inflationary because firms fail to anticipate future wage pressure. Forward guidance weakens at long horizons but strengthens in the near term.

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  • Robert Minton & Hugo Monnery, 2026. "How Firms Form Beliefs and the Implications for Inflation," Finance and Economics Discussion Series 2026-053, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:103588
    DOI: 10.17016/FEDS.2026.053
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    1. Dmitry Taubinsky & Luigi Butera & Matteo Saccarola & Chen Lian, 2024. "Beliefs About the Economy are Excessively Sensitive to Household-Level Shocks: Evidence from Linked Survey and Administrative Data," NBER Working Papers 32664, National Bureau of Economic Research, Inc.
    2. George William Evans, 2001. "Expectations in Macroeconomics Adaptive versus Eductive Learning," Revue économique, Presses de Sciences-Po, vol. 52(3), pages 573-582.
    3. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    4. Luca Gagliardone & Mark Gertler & Simone Lenzu & Joris Tielens, 2025. "Anatomy of the Phillips Curve: Micro Evidence and Macro Implications," American Economic Review, American Economic Association, vol. 115(11), pages 3941-3974, November.
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    1. Philippe Andrade & Alexander Dietrich & John Leer & Jenny Tang & Egon Zakrajšek, 2026. "The Future in Today’s Prices: Evidence from a Survey of U.S. Firms," Working Papers 26-11, Federal Reserve Bank of Boston.

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