Expectations come up often in economics. Expected future price affects both supply and demand curves. Expected inflation gets built in to interest rates. Businesses base investment decisions on the expected sales they will generate.
See Why Tariffs Are a Key Wild Card for the Fed: A trade war that stokes inflation would be much more complicated for the central bank now than it was during Trump’s first term by Nick Timiraos of The WSJ. Excerpt:
"Fed officials closely monitor inflation expectations, captured from both consumer surveys and market-based measures, because “if people expect inflation to be higher, they will respond and react differently, in a way that will drive more inflation,” said Cleveland Fed President Beth Hammack in an interview this month.
For example, if landlords expect their costs to go up in the future, they will raise rents to get ahead of cost increases. Workers will negotiate for higher raises.
A survey of consumers by the University of Michigan released last week showed inflation expectations have edged up since November’s election. Researchers who conducted the survey said consumers continued to spontaneously express that they were buying cars and other durable goods now to avoid future price increases.
Investors’ expectations of inflation one and two years ahead have ticked up over the past few months, even though longer-run expectations are little changed, according to measures such as the two-year inflation break-even rate."
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