How do inflation expectations influence the behavior of consumers and businesses?
Answer (1)
Inflation expectations play a big role in how people and businesses make decisions. If consumers and firms believe that prices will continue to rise in the future, they change their behavior today to protect themselves. This can actually cause inflation to rise faster, even if the economy is not overheating yet.Let’s look at consumers first. If a family in the Philippines expects that the price of rice, gas, or school supplies will go up next month, they will try to buy now rather than later. This increased demand puts more pressure on prices today. When many people act the same way, demand rises and prices go up faster—this is how expectation becomes reality.For example, during inflation surges in the Philippines, many shoppers “panic buy” cooking oil or sugar. In 2022, when there were news reports about sugar shortages, prices jumped because people bought in bulk, expecting even higher prices. This is partly due to fear, but it’s also based on the expectation that prices will rise.Businesses respond similarly. If they believe inflation will continue rising, they increase their prices early to stay ahead. They also ask for higher wages from workers or increase wages to retain staff, expecting that workers will need more money to afford goods. This can lead to a wage-price spiral—higher wages lead to higher production costs, which leads to higher prices.Inflation expectations also affect investment decisions. If firms believe that inflation will go up, they may delay new projects or adjust their financial plans. They might also borrow more today while interest rates are low, expecting that money will be worth less later.This is why central banks care so much about managing expectations. In the Philippines, the BSP makes public announcements, sets clear inflation targets, and uses interest rate changes to show they’re serious about keeping inflation under control. If people believe the central bank is credible, expectations remain stable—and that helps keep actual inflation under control too.
