August 2026
Inflation Uncertainty and Endogenous Planning Horizons
Christopher Gust, Edward Herbst, and David López-Salido
Abstract:
We develop a finite-horizon planning model in which firms choose how far ahead to plan when setting prices. Planning further ahead improves a firm’s pricing decision but requires cognitive effort. We derive analytical solutions for a firm’s chosen planning horizon and show that large and persistent aggregate demand or supply disturbances induce firms to plan further ahead, making inflation more sensitive to shocks and generating endogenous movements in inflation uncertainty. Quantitatively, we show that the model matches the positive relationship between the size of inflation forecast revisions and inflation uncertainty observed in the data.
Keywords: Inflation uncertainty, finite-horizon planning, inflation expectations
DOI: https://doi.org/10.17016/FEDS.2026.055
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Last Update:
August 06, 2026
