Deflation v disinflation   Why inflation is bad   Goal of low inflation   Why the RBA targets 2-3%   Measurement of inflation    Headline v underlying   Inflationary expectations   Economicstutor..com.au

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 Course notes quick navigation

1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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inflationary expectations


Expectations of future price increases can actually cause inflation to occur.  This is because workers, suppliers, producers and governments expect prices to rise and seek to maintain their real incomes by demanding higher wages, taxes, profits etc, even before price actually rise.  Accordingly, the expectation of future price rises by economic agents, and their subsequent action to counter the effects of these future price rises, actually causes inflation.  To illustrate, if wage earners expect prices to increase they will tend to demand wage increases that are passed on by employers in the form of higher prices.  This can actually trigger a wage/price spiral that can be difficult for governments to reverse.  We will see later that the RBA implements monetary policy with a view to not only dampen inflationary pressures, but to kill off any inflationary expectations.  Central banks believe that it is only when inflationary expectations are minimised via disciplined inflation targeting that low inflation can be achieved.

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