The Future in Today’s Prices: Evidence from a Survey of U.S. Firms 
An important element of modern macroeconomic models is the forward-looking nature of firms’ pricing decisions, that is, that firms incorporate expectations about future costs and economic conditions alongside current marginal costs when setting prices. However, despite this behavior being a central feature of New Keynesian frameworks used for policy analysis, direct micro-level evidence validating this pricing dynamic is scarce. Standard firm-level data rarely capture the joint observation of realized price changes, contemporaneous cost changes, and firms’ expected future cost changes—the key components necessary to test the theoretical pricing equation empirically. This data limitation has prevented economists from confirming whether firms actually behave as models describe and from quantifying the relative importance of realized versus expected costs in pricing decisions. This paper addresses this evidence gap by fielding a novel survey of U.S. small and medium-sized businesses designed to elicit these specific pricing components, combined with an identification strategy that exploits trade-policy shocks to establish causal effects.
Key Findings
- Both current and expected costs significantly influence pricing decisions. Firms incorporate realized cost changes with a pass-through of approximately 68 percent and expected future cost changes with a pass-through of about 43 percent.
- Pricing behavior varies systematically by adjustment frequency. Frequent price adjusters exhibit nearly complete contemporaneous pass-through with minimal sensitivity to future costs, while infrequent adjusters place substantially greater weight on expected costs while exhibiting muted responses to realized changes.
- Sectoral differences in pricing are pronounced. Goods-producing firms show near-complete contemporaneous pass-through with limited forward-looking behavior, whereas service-sector firms are significantly more forward-looking, incorporating both realized and expected cost changes into their pricing decisions. This behavior appears to be related to the relatively greater share of costs devoted to labor by services firms.
- Uncertainty shifts pricing weight toward expectations. Firms facing higher uncertainty about future costs respond more strongly to expected future costs, systematically tilting their pricing behavior toward forward-looking considerations when the cost outlook is more uncertain.
- These patterns are difficult to reconcile with models in which the timing of firms’ price adjustments is exogenous. By contrast, they arise naturally in frameworks such as menu-cost models, in which both the timing of adjustment and the sensitivity of the chosen prices to cost expectations are endogenous to firms’ economic states and characteristics.
Implications
The findings demonstrate that inflation dynamics operate through dual channels that have important implications for monetary policy and stabilization. Cost shocks affect prices not only through realized costs but also through expected future costs that firms incorporate immediately at the time of price adjustment. This means that inflation can respond to changes in the economy that may raise firms’ costs in the future even before those increases materialize. For policymakers, these findings highlight that policy communication serves as a direct stabilization tool. By shaping both the expected path and the uncertainty surrounding future costs through clear forward guidance and credible commitments, central banks can influence price-setting behavior and inflation dynamics in real time, making expectation management particularly crucial during periods of heightened economic uncertainty.
Abstract
Do firms adjust prices to realized costs, expected costs, or both? We address this question using a new survey of U.S. businesses that separately measures realized cost changes since the last price adjustment and expected cost changes over the subsequent year, including portions attributable to 2025 trade policies. Using perceived tariff exposure as an instrument, we identify the causal effects of realized and expected costs on prices. Reset prices incorporate almost 70 percent of current costs and nearly 45 percent of expected costs over the next year. The importance of these channels varies significantly across firms. Frequent price adjusters respond mainly to current costs, while sticky-price firms weight expectations more heavily. Goods producers adjust contemporaneously, whereas service firms are more forward looking, as are firms with a high labor share or facing high trade uncertainty. This evidence favors endogenous pricing frameworks in which uncertainty reshapes the reset-price kernel across horizons or imperfect-information models in which uncertainty amplifies the role of expectations over standard time-dependent models.