What is the role of inflation expectations in shaping actual inflation, and how do central banks like the BSP manage these expectations?
Answer (1)
Inflation expectations are what people believe will happen to prices in the future, and they play a big role in shaping actual inflation. If consumers, workers, and businesses expect prices to rise soon, they adjust their behavior now—leading to real price increases even before actual inflation happens. This is what economists call a self-fulfilling prophecy.Here’s how it works: If Filipino workers expect inflation to rise, they will ask for higher wages to protect their purchasing power. If employers believe prices will go up, they might raise prices early to cover future costs. When everyone acts based on these expectations, inflation actually does rise—even if the original cause was small or temporary.That’s why managing inflation expectations is a key job of the Bangko Sentral ng Pilipinas (BSP). The BSP does this in a few important ways:Communicating clearly – The BSP regularly publishes inflation forecasts and policy statements to inform the public. If people know the BSP is acting responsibly, they won’t panic and raise prices or wages too soon.Adjusting interest rates – When inflation expectations rise, the BSP may raise interest rates to show it’s serious about keeping inflation in check. This sends a signal to markets that inflation will be controlled.Monitoring public behavior – Surveys are done to check what people expect. If many Filipinos say they expect prices to rise fast, the BSP takes that seriously.A local example: In 2018, the TRAIN law and rising oil prices caused a spike in inflation. People expected it to continue, and price increases spread quickly. The BSP had to raise rates and reassure the public to prevent inflation from becoming uncontrollable.In conclusion, inflation expectations affect how people spend, save, invest, and set prices. The BSP’s ability to maintain public trust is critical to preventing inflation from spiraling out of control—even before it begins.
