by Frank Shostak
Mises.org
Many believe the key cause to a general increase in prices are so-called “inflationary expectations.” For instance, if there is a large increase in the prices of oil, individuals will start forming expectations for higher inflation ahead. Consequently, individuals will speed up their purchases of goods and services at present, thereby raising the demand for goods and services, all other things being equal. This is supposed to set in motion general price increases. According to the former Fed Chairman Ben Bernanke, “Undoubtedly, the state of inflation expectations greatly influences actual inflation and thus the central bank’s ability to achieve price stability.”
It is believed that, if inflationary expectations could be made less responsive to various shocks, then, over time, this would mitigate the effects of these shocks on the momentum of the prices of goods and services. Most commentators believe central bank policies can be employed to bring individuals’ inflationary expectations to a state of equilibrium.