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Ask the Expert

How have the high inflation rates in 2022 and 2023 affected CEOs’ expectations of future inflation, and why does that matter?

As appeared in the Cleveland Fed Digest’s Ask the Expert

The Survey of Firms’ Inflation Expectations, or SoFIE, is a tool that allows us to see what executives are thinking about inflation, which can potentially affect their price-setting decisions. Created in 2018 by external researchers and assumed by the Cleveland Fed this year, the survey is another measure that our Center for Inflation Research makes available to the public, researchers, and policymakers to better understand inflation and its determinants. High inflation impacts everybody, in ways that can often harm individuals, and the more we know about what moves inflation, the more policymakers can take actions to bring inflation down to a lower level that imposes fewer costs on society.

SoFIE is a nationally representative survey of top business executives’ inflation expectations. It’s asking them once per quarter what they think inflation will be over the next 12 months and asks a rotating second question about past inflation, inflation over a longer horizon, the likelihood of high inflation, and what they think the Federal Reserve is going to achieve over the longer term. It’s fielded to firms in the manufacturing and services sectors, so it’s broadly representative of the entire economy. Through SoFIE, we do see that when inflation was low before the pandemic, these executives’ inflation expectations were pretty low. Then when inflation started to move up, inflation expectations started to move up, as well. As inflation started to come down, we’re starting to see the inflation expectations of executives starting to come down a little, but they remain higher than they were before the pandemic, and that’s consistent with the fact that inflation itself remains elevated. It does raise a key question about the direction of causality: Is it that inflation is affecting inflation expectations, or are inflation expectations driving and affecting inflation? It’s hard to say.

Several economic theories suggest that what people expect to happen to inflation influences inflation today. As a consumer, if I think inflation is going to be high in the future, I might ask for a bigger raise today to get ahead of those higher prices, or, if I’m a firm, I might raise my prices today to preemptively offset higher inflation and higher costs for my products in the future. One of the reasons why it’s interesting to ask top executives about their inflation expectations is that there’s some evidence they might act on those beliefs, and those individuals have some control over what prices are charged and the level of wages paid in the economy. They drive actual inflation.

This indicator was created to fill a gap in our knowledge. We have long-running measures of consumers’ inflation expectations and professional forecasters’ inflation expectations, and those are useful, but we did not have a commensurate measure of price-setters’ expectations. SoFIE fills in what the price setters actually are thinking about inflation, complementing the series already out there. This gives researchers, policymakers, and the public a more complete view of what’s happening with inflation, which affects everyone in the economy.