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We analyze how firms form their inflation expectations after a regime change in monetary policy and a transition to a low-inflation environment. Utilizing the Bank of Israel’s survey of firms, we document the basic properties of firms’ inflation expectations and investigate how Israeli firms update their inflation expectations after receiving new information about inflation or monetary policy. We find that a positive inflation surprise leads to a sizable upward adjustment in inflation expectations. A surprise hike in the monetary interest rate leads to a downward adjustment in inflation expectations.
