Using data from the euro area SAFE, a novel survey of firms' inflation expectations including a randomized controlled trial (RCT), we show that firms' inflation expectations exhibit significant heterogeneity, challenging the predictions of full-information rational expectations models. At the same time, we document that firms update beliefs rationally but under incomplete information, with geographic location playing a dominant role in shaping expectations. Firms extrapolate from regional and national inflation to form euro area inflation expectations. A basic "Lucas island" model calibrated to euro area data replicates key empirical moments and highlights the structural "pass-through" from national to aggregate expectations. Our findings underscore challenges in anchoring inflation expectations in a heterogeneous monetary union.

Suggested citation:

Baumann, Ursel, Annalisa Ferrando, Dimitris Georgarakos, Yuriy Gorodnichenko, and Timo Reinelt. 2025. "Firms' Inflation Expectations in a Monetary Union." Federal Reserve Bank of San Francisco Working Paper 2025-29. https://doi.org/10.24148/wp2025-29