What are inflation expectations?

Inflation expectations refer to the future inflation currently expected by economic agents.

Inflation expectations are important because they influence our behaviour, forming the basis of the spending and investment decisions that we make today. For instance, your inflation expectations might determine whether you decide to buy a new car now or at a later date: if you expect inflation will be very high, you would buy today, whereas, if you think it will be low, you might decide to postpone the purchase. If companies think that inflation will be low, they will raise their product prices more slowly. Likewise, if workers expect inflation to hold at low levels, they will accept lower wage increases. This is how inflation expectations shape inflation in the present.

Inflation expectations cannot be observed, but they can be estimated from surveys or financial instruments whose returns are linked to future inflation. When the central bank’s inflation target is clear and predictable, the public anchors its expectations to that target, which is conducive to price stability. Conversely, if expectations deviate significantly from the central bank’s target, it will be harder to stabilise inflation around that target.