Introduction

Inflation expectations began rising with inflation in the aftermath of the COVID-19 pandemic. The literature has documented that inflation expectations affect firms’ price-setting decisions, households’ consumption behavior, and workers’ actions in the labor market, circumstances implying that higher inflation expectations could increase inflation persistence. Given that inflation and inflation expectations can feed into each other, the degree to which inflation expectations are anchored around a central bank’s inflation objective may be an important metric for policymakers to monitor.

Taking advantage of the novel Survey of Firms’ Inflation Expectations (SoFIE), we explore the degree of anchoring of US firms’ medium-term inflation expectations, measured as expected inflation (on average) for the four years beginning one year from today. We consider an anchoring metric that combines two key components (Naggert et al., 2023; Kumar et al., 2015): 1) firms’ disagreement about future inflation and 2) misalignment between the mean of firms’ inflation expectations and the inflation objective of the Federal Open Market Committee (FOMC). The availability of data on individual firms’ subjective perceptions of the FOMC’s inflation objective is unique and allows us to gain additional insights into the drivers behind the misalignment component. Specifically, we decompose misalignment into two subcomponents: 2a) misalignment between firms’ inflation expectations and their subjective perceptions of the FOMC’s inflation objective and 2b) misalignment between firms’ subjective perceptions of the FOMC’s inflation objective and the FOMC’s actual 2 percent objective.

We show that the anchoring of firms’ medium-term inflation expectations weakened significantly during the pandemic inflation surge because of increased disagreement about future inflation and greater misalignment between firms’ inflation expectations and the FOMC’s 2 percent objective. The heightened levels of disagreement continued to persist through the end of 2024. At the onset of the inflation surge in 2021, the misalignment component was entirely driven by the deviation of firms’ inflation expectations from their subjective perceptions of the FOMC’s inflation objective. However, as inflation continued to increase, the composition of the misalignment term changed such that in 2022 it was primarily driven by the deviation of firms’ subjective perceptions of the FOMC’s inflation objective from 2 percent. This component of misalignment continued to contribute to the unanchoring of firms’ inflation expectations in 2023. Since 2023, the anchoring of medium-term inflation expectations has strengthened substantially, but it remained somewhat weaker during 2025 than the prepandemic average.

Comparing the degree of unanchoring in the manufacturing versus services sectors, we find that the anchoring of medium-term inflation expectations weakened for firms in both sectors. However, the unanchoring in the manufacturing sector was more pronounced compared to the services sector, likely because of the notable pickup in goods-price inflation in 2021 (see, for instance, Hajdini et al., 2025). In both sectors, greater disagreement in firms’ expectations was the principal source for the dramatic rise and sustained increase in unanchoring in 2021 and 2022. In 2021, the aggregate misalignment between firms’ expectations and their subjective perception of the FOMC’s objective was very similar across the manufacturing and services firms, whereas in 2022 the deviation of this subjective perception and 2 percent was much more concentrated in the services sector.

Survey of Firms’ Inflation Expectations

Our analysis is based on the Survey of Firms’ Inflation Expectations (SoFIE), which is a quarterly survey of chief executive officers and other top executives that has been running since 2018:Q2. Survey data are collected during January, April, July, and October, the first month of each quarter. The surveyed firms represent various industries within either the manufacturing sector or the services sector. In this Economic Commentary, we make use of the following three questions in the survey:

1-year inflation expectations, asked each quarter: “What do you think will be the inflation rate (for the Consumer Price Index) over the next 12 months? Please provide an answer in an annual percentage rate.”
5-year inflation expectations, asked each fourth quarter: “What do you think will be the average inflation rate (for the Consumer Price Index) over the next 5 years? Please provide an average annual percentage rate.”
Inflation objective perception, asked each second quarter: “What annual inflation rate do you think the US Federal Reserve is trying to achieve on average? Please provide an average annual percentage rate.”

Following Candia et al. (2024), we interpret the latter question as measuring firms’ familiarity with the FOMC’s inflation objective. That is, we view firms’ reported subjective perceptions of the FOMC’s inflation objective as an indication of their knowledge and informedness about the stated numerical value of this goal of monetary policy.

We are interested in measuring the anchoring of firms’ medium-term inflation expectations at the FOMC’s 2 percent objective. To mitigate concerns that the five-year inflation expectations also embed short-term inflation expectations, we construct a measure of firms’ four-year/one-year-forward inflation expectations. This is possible in each fourth quarter, when we observe both one-year and five-year inflation expectations. Specifically, we construct a four-year/one-year-forward measure of inflation expectations as the average annual inflation over a four-year horizon starting one year ahead: