The Speed of Firm Response to Inflation

Abstract This paper analyses the response of UK firms to monthly CPI inflation releases using high-frequency data from a large business survey. Firms’ inflation perceptions and expectations respond within hours of new inflation data releases. Firm expectations are most responsive when inflation coverage in the media is elevated, suggesting a key role for the media in focusing attention on data releases. Furthermore, firms respond to changes in inflation data, but not to surprises relative to professional forecasts. This highlights a distinction between ‘Wall Street’, where financial markets respond to inflation surprises, and ‘Main Street’, where firms respond to media inflation headlines.