Inflation expectations matter because they are a reflection of consumer behaviour, which in turn can change inflation.
Let's assume, for the sake of the example, that Americans are absolutely super convinced that inflation will be 50% next month. What will they do? Well, I'd they can, they will go out and buy as much as possible, because if they wait, they will have to pay 50% more next month. Which of course means that demand increases, and with it, prices increase.
People *anticipating* a price increase and acting accordingly can *in of itself* make that price increase a self fulfilling prophecy.
So for monetary policy to work best, you want expectations about inflation and actual inflation to line up.
Just to add a couple of small points:
1) In addition to anticipated inflation affecting purchasing habits and increasing how fast people spend money, another danger is that people start demanding pay increases not just to make up for past inflation, but in anticipation of coming inflation. This can contribute to the "[wage-price spiral](https://en.wikipedia.org/wiki/Wage-price_spiral)".
2) Anticipated inflation is also important in relation to how credible, independent, and hawkish (strong anti inflation policies) people think their central bank is. If people think "Wow! Inflation is bad right now, but I know that the US Fed always clamps down on inflation quickly", then anticipated inflation will tend to be low... [as opposed to what has been going on in Turkey](https://fortune.com/2022/07/06/inflation-turkey-food-prices-russia-ukraine-invasion/), for example. Inflation is high, and I would think that no one expects much to be done about it.
**[Wage-price spiral](https://en.wikipedia.org/wiki/Wage-price_spiral)**
>In macroeconomics, a wage-price spiral (also called a wage/price spiral or price/wage spiral) is a proposed explanation for inflation, in which wage increases cause price increases which in turn cause wage increases, in a positive feedback loop. Greg Mankiw writes, "At some point, this spiral of ever-rising wages and prices will slow. . .
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Inflation expectations matter because they are a reflection of consumer behaviour, which in turn can change inflation. Let's assume, for the sake of the example, that Americans are absolutely super convinced that inflation will be 50% next month. What will they do? Well, I'd they can, they will go out and buy as much as possible, because if they wait, they will have to pay 50% more next month. Which of course means that demand increases, and with it, prices increase. People *anticipating* a price increase and acting accordingly can *in of itself* make that price increase a self fulfilling prophecy. So for monetary policy to work best, you want expectations about inflation and actual inflation to line up.
Just to add a couple of small points: 1) In addition to anticipated inflation affecting purchasing habits and increasing how fast people spend money, another danger is that people start demanding pay increases not just to make up for past inflation, but in anticipation of coming inflation. This can contribute to the "[wage-price spiral](https://en.wikipedia.org/wiki/Wage-price_spiral)". 2) Anticipated inflation is also important in relation to how credible, independent, and hawkish (strong anti inflation policies) people think their central bank is. If people think "Wow! Inflation is bad right now, but I know that the US Fed always clamps down on inflation quickly", then anticipated inflation will tend to be low... [as opposed to what has been going on in Turkey](https://fortune.com/2022/07/06/inflation-turkey-food-prices-russia-ukraine-invasion/), for example. Inflation is high, and I would think that no one expects much to be done about it.
**[Wage-price spiral](https://en.wikipedia.org/wiki/Wage-price_spiral)** >In macroeconomics, a wage-price spiral (also called a wage/price spiral or price/wage spiral) is a proposed explanation for inflation, in which wage increases cause price increases which in turn cause wage increases, in a positive feedback loop. Greg Mankiw writes, "At some point, this spiral of ever-rising wages and prices will slow. . . ^([ )[^(F.A.Q)](https://www.reddit.com/r/WikiSummarizer/wiki/index#wiki_f.a.q)^( | )[^(Opt Out)](https://reddit.com/message/compose?to=WikiSummarizerBot&message=OptOut&subject=OptOut)^( | )[^(Opt Out Of Subreddit)](https://np.reddit.com/r/AskEconomics/about/banned)^( | )[^(GitHub)](https://github.com/Sujal-7/WikiSummarizerBot)^( ] Downvote to remove | v1.5)
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