Definition
Inflation expectations are the views that workers, businesses, and investors hold about how much prices will rise over a coming period. They are not the actual inflation rate but a forecast — informed, guessed, or assumed — that shapes economic decisions made today.
Because so many decisions depend on the future, expectations are not a passive prediction. They feed back into the economy and help determine the inflation that actually occurs, making them a central concern for monetary policy.
Why it matters
How it works
When workers expect higher inflation, they bargain for larger raises; firms expecting higher costs raise prices pre-emptively; lenders demand higher interest rates. Each of these actions, taken together, can produce the very inflation that was expected — a wage-price spiral. This is why central banks invest heavily in credibility: if the public trusts that policymakers will keep inflation near a stated target, expectations stay anchored and a one-off shock fades on its own. If credibility erodes, expectations become unmoored, and bringing inflation back down can require high interest rates and a recession.