The Shape of Firms' Inflation Expectations: Uncertainty, Skewness, and Tail Risks

ABSTRACT

We use firm‐level survey data from Uruguay that elicit full subjective probability distributions over future inflation to study how perceived tail risks and uncertainty shape inflation expectations in a persistent‐inflation environment. Firms assign non‐negligible probability mass to high‐inflation outcomes, revealing persistent upside risks in their beliefs even when average inflation moderates. We construct a transparent firm‐level measure of uncertainty based on the dispersion of each firm's implied probability distribution and document substantial heterogeneity across firms and over time. Higher uncertainty is systematically associated with higher 12‐month‐ahead inflation expectations, even after controlling for lagged inflation. This result is not a mechanical artifact of distributional skewness and holds across alternative measures of dispersion. These findings highlight the information content of probabilistic survey questions and the importance of accounting for tail beliefs when analyzing the formation of expectations in high‐inflation environments.