Inflation Expectations and the ECB’s Perceived Inflation Objective: Novel Evidence from Firm-Level Data

In this paper we use a unique dataset to study how awareness of the formulation of the ECB’s inflation aim, defined as "below, but close to, 2%", shapes the inflation expectations of a representative set of Italian firms. In particular, we show that in the period under consideration such awareness raises firms’ inflation expectations by about 25 basis points at all time horizons with respect to the control group. In the recent period of low inflation, this finding implies that being informed about the ECB’s aim stabilizes firms’ inflation expectations at higher levels, closer to its target. However, this occurs at the expense of a lower correspondence of such expectations with ex-post realized inflation, especially on short-term horizons. When explicitly asked, the majority of firms indicates the ECB inflation aim as being between 1.0% and 1.5%, while just a few of them see it as between 1.7% and 1.9%. This result might be related to the difficulty of interpreting the “below, but close to” formulation, and suggests that a precise definition of the ECB’s inflation aim could be easier to communicate and more likely to be properly understood.