The green transition and firms' expectations on future prices: Survey evidence

Although firms' expectations on future price dynamics are key for monetary policy, we still lack information on the expected effect of the transition to a net-zero economy on future prices. This paper fills this gap in the literature using survey data collected in the first quarter of 2022 on Italian firms' expectations of the impact of the Fit-for-55 - the package established by the EU to achieve its climate targets - on the prices of the goods and services they purchase. First, it documents that almost half of the sample expects that the Fit-for-55 plan will increase their input costs over the short and medium term, while the rest foresee no effect on prices. Then, it shows that firms extrapolate their private experience of high energy prices and shortages in raw materials when forming their expectations. These are salient events that are likely to be recalled relative to the others stored in memory when forming expectatons. In contrast, aggregate information such as energy, oil, and gas prices do not enter the expectations formation process. Finally, a propensity score analysis shows that the expected price impact of the green transition shapes firms' pricing and investment choices such that firms expecting the transition to raise the prices of the inputs they will purchase in the medium term increase (or intend to increase) their selling prices more than the others and are more likely to invest in improving their energy efficiency.