Firms' Inflation Expectations and Pricing Strategies During Covid-19

We use the Bank of Italy's Survey on Inflation and Growth Expectations to explore how the COVID-19 shock affects firms’ pricing policies and their inflation expectations. We find that the longer the time deemed necessary to return to their normal business levels and the greater the attention they pay to their competitors’ pricing policies, the more likely firms are to reduce their own product prices. Moreover, firms' inflation expectations react to the expected persistence of the macroeconomic effects of the shock. We rationalize this evidence through the lens of a general equilibrium model