Understanding Inflation Signals: Expectation Formation Across Economic Agents
Joint with Geoff Kenny and Dimitris Georgarakos

This paper studies expectation formation among households and firms using rich micro-level data from Italy, focusing on their responses to official CPI releases. We test whether agents form expectations in a naïve, backward-looking manner—reacting to realized inflation—or in a more sophisticated way, responding to the exogenous component of inflation news as measured by CPI surprises extracted from financial markets. We document stark differences across agent types. Firms adjust their inflation expectations primarily in response to CPI surprises, consistent with sophisticated expectation formation, while households respond mainly to realized CPI changes. These patterns cannot be explained by lower household attention to inflation releases. Furthermore, we uncover substantial heterogeneity within both households and firms based on their characteristics. Our findings highlight systematic heterogeneity in expectation formation and have important implications for the transmission of monetary policy and the design of central bank communication.