## Inflation Expectations and the Supply Chain

_IMF Working Papers, August 12, 2022_

## Source details

**Canonical URL:** [Inflation Expectations and the Supply Chain](https://www.imf.org/en/publications/wp/issues/2022/08/08/inflation-expectations-and-the-supply-chain-521686)

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## Bibliographic details
- Authors: Elías Albagli, Francesco Grigoli, Emiliano Luttini
- Published: August 12, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400214752.001

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### Summary findings
- Firms rely on price changes observed along their supply chain to form expectations about aggregate inflation.
- These expectations have a complete pass-through to sales prices.
- Changes in prices at which firms purchase inputs inform their forecasts of the economy’s inflation, even if changes in input costs do not determine the inflation outcome.
- The findings reject the full-information rational-expectations hypothesis.
- Results are consistent with firms’ disagreement about future inflation and inattention to macroeconomic news, which the authors document for Chile.
- A firm-level Phillips’ curve estimation suggests that firms’ beliefs about inflation are a key determinant for their price-setting decisions.
- The highlighted channel has the potential to lead to dispersion in inflation expectations, price dispersion, and weaken the expectation channel of policies.

### Data and methodology
- Leveraging a unique dataset on Chilean firms merging expectation surveys and records from the VAT and customs registries.
- Firm-level Phillips’ curve estimation is used to link beliefs about inflation to price-setting decisions.

### Policy-relevant implications
- Dispersion in firm-level inflation beliefs can translate into price dispersion across firms.
- Inattention to macroeconomic news and disagreement about inflation can weaken the effectiveness of policies that operate through the expectation channel.
- Because firms pass through supply-chain price signals into sales prices, shocks to input prices can affect aggregate inflation expectations even when they do not change realized inflation.

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2022/08/08/inflation-expectations-and-the-supply-chain-521686_