Why is it important for central banks to manage inflation expectations, and how can public fear of inflation affect the actual economy?
Answer (1)
Managing inflation expectations is one of the most important jobs of a central bank like the Bangko Sentral ng Pilipinas (BSP). Expectations refer to what people believe will happen to prices in the future. If people expect inflation to rise, they might change their behavior—and this change can cause inflation to happen even if there was no serious reason in the first place.For example, if Filipino consumers think that prices of goods like rice, gas, and cooking oil will go up next month, they may decide to buy more now before the prices rise. When many people do this, it increases demand in the short term, and sellers might raise prices earlier than planned. This is called demand-pull inflation, and it’s fueled not by real shortages, but by fear.Also, if workers expect inflation to rise, they may ask for higher wages in advance to protect their purchasing power. Employers might then raise their prices to cover the higher payroll costs. This can create a wage-price spiral, where wages and prices keep pushing each other higher. Businesses might also hesitate to invest if they’re unsure about future costs.To avoid this, central banks use clear communication and monetary policy tools (like interest rates) to show that they are in control. For example, if BSP says inflation is under control and raises interest rates to support this claim, people feel more confident. But if BSP stays silent or seems unsure, people may lose trust and panic.This is why central bank leaders—like the U.S. Federal Reserve’s Alan Greenspan—are careful with their words. A single careless comment about inflation can cause financial markets to move and consumer behavior to change.In summary, fear of inflation can cause inflation, so managing expectations is key. It's like calming a crowd during a fire drill—you need to be clear, calm, and confident to avoid chaos.
