US firms integrate 43% of expected costs into prices
A new Danmarks Nationalbank working paper finds that U.S. firms incorporate 43 percent of expected future costs into their reset prices. This forward-looking behavior varies across firms, with sticky-price firms and service providers placing more weight on expectations.
The dual pass-through of costs
The study, based on a new survey of U.S. businesses, reveals an incomplete pass-through of both realized and expected costs to reset prices.
Firms incorporate approximately 68 percent of current costs incurred since the last price adjustment.
Crucially, reset prices also reflect about 43 percent of expected costs over the subsequent year.
This dual channel of price adjustment exhibits significant heterogeneity across firms.
Frequent price adjusters primarily respond to current costs, while firms with sticky prices place a greater emphasis on future expectations.
Similarly, goods producers adjust prices more contemporaneously, whereas services firms demonstrate a more forward-looking approach, a pattern also observed in firms facing high trade uncertainty.
The survey specifically measured realized cost changes and expected cost changes, including those linked to new trade policies introduced in 2025.
Uncertainty's forward tilt in pricing
The research employs individual perceived tariff exposure as an instrument to identify the causal effects of realized and expected costs on price changes.
This approach leverages unexpected trade-policy changes as a source of cross-sectional variation.
An important finding is that uncertainty significantly shifts pricing behavior towards expectations.
Firms facing higher subjective uncertainty, inferred from their tariff-related cost expectations, respond more strongly to expected future costs.
This is consistent with endogenous pricing frameworks where uncertainty reshapes the reset-price kernel across horizons, or imperfect-information models where uncertainty amplifies the role of expectations in price setting.
Policy's new lever in inflation
These findings underscore that inflation can respond immediately to changes in expected costs, even before those costs materialize.
This highlights a critical, state-dependent role for policy communication as a stabilization tool, particularly under heightened uncertainty.
By shaping both the expected path and the uncertainty surrounding future costs, policymakers gain a direct influence over real-time price setting and inflation dynamics.