Expected inflation refers to the anticipated rate of increase in the general price level of goods and services in an economy over a certain period of time, usually a year. It is a forward-looking measure of inflation, based on economic indicators, market expectations, and other factors.
Expected inflation is important because it affects many economic variables, including interest rates, investment decisions, and consumer behavior. For example, if investors expect high inflation in the future, they may demand higher nominal interest rates to compensate for the expected loss in purchasing power of their returns. Similarly, consumers may adjust their spending habits based on expected changes in prices, which can have a significant impact on the overall economy.
Expected inflation is often measured by surveys, such as the University of Michigan's Survey of Consumer Attitudes and Behavior or the Philadelphia Federal Reserve's Survey of Professional Forecasters. Central banks also closely monitor expected inflation when setting monetary policy, as they aim to maintain price stability by keeping inflation within a target range.
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