How does the concept of inflation expectations influence actual inflation?
Answer (1)
Inflation expectations refer to what people believe will happen to prices in the future. Interestingly, what people expect about inflation can actually cause real inflation to happen. This is because economic decisions—like spending, saving, and setting wages—are influenced by what people think will happen next.For example, if people believe that prices will go up soon, they may decide to buy now instead of later. Businesses may raise prices early, and workers may ask for higher wages to keep up. This behavior increases demand and costs, which leads to actual inflation. It becomes a self-fulfilling prophecy—where fear or belief makes the event come true.Let’s say a bakery in Manila hears that flour prices might rise in the next three months. The bakery might decide to raise bread prices now, even if nothing has changed yet. Other bakeries might follow. Customers, worried that prices will keep rising, may start bulk-buying bread. As demand increases, so do prices. Inflation has now been triggered by expectations, not by actual shortage.Central banks like the Bangko Sentral ng Pilipinas (BSP) know this. That’s why they try to keep public expectations stable. They make announcements about inflation targets and explain their plans clearly. If people believe the central bank is in control, they won’t panic—and inflation stays manageable.In the U.S., during the recovery from the 2008 crisis and the COVID-19 pandemic, the Federal Reserve faced the challenge of balancing inflation expectations. They had to act and speak carefully to avoid scaring the public or triggering panic buying or wage spirals.In conclusion, expectations are powerful in economics. Policymakers must manage not just real data, but also public trust. By guiding what people expect, they can influence what actually happens in the economy.
