Atlas Macro

Economy

Inflation Expectations

What households, businesses and investors expect inflation to be in the future. They matter because expectations shape wage demands and price-setting, so they can make inflation self-fulfilling.

Key points

  • Measured by surveys (such as the University of Michigan survey) and by market prices (breakeven inflation).
  • Central banks aim to keep long-term expectations anchored near 2%.
  • If expectations rise, central banks may need higher rates to bring inflation down.

Example

If workers expect 5% inflation next year, they may push for 5% pay rises; companies facing those costs raise prices, helping make the forecast come true.

In history

In the 1970s expectations of high inflation became entrenched and took a deep recession to break. In 2022, despite 9% inflation, long-term market expectations in the US stayed around 2-2.5%, one reason inflation fell back faster.

Related terms