Answer to Question #194967 in Microeconomics for rev

Question

Inflation expectations are self-fulfilling if firms can adjust their prices very easily in response to economic news.

Answer 1

Inflation expectations are sought to capture forces vital to the determination of inflation. For instance, inflation expectations is likely to influence wage demands that could in turn affect firms' pricing decisions. When inflation comes as a surprise, and persists in a long term a basis, lead to a prolonged or reemergence of more inflation. Thus, is organizations and consumers expect future inflation then it can become a self-fulfilling prophecy. If workers expect future inflation, they are more likely to bargain for higher wages to compensate for the increased cost of living. If workers can successfully bargain for higher wages, this will contribute towards inflation.