Inflationary Expectations?

[Klexos]

I do not think this particular concept is detrimental to knowing the syllabus, however I see this terminology in Topic 3 regarding inflation and don't really understand what it means!

Help with its definition and its effects is much appreciated!

[hermansia12]

I do not think this particular concept is detrimental to knowing the syllabus, however I see this terminology in Topic 3 regarding inflation and don't really understand what it means!

Help with its definition and its effects is much appreciated!

Hi Klexos!

Inflation is the gradual increase in prices of commodities- Now Inflationary expectations happens when consumers anticipate a rise in price (This could be because of anticipated supply shortage, seasonal, rumours etc.). When this occurs, consumers will usually buy more in order to "escape" the anticipated rise in price. This will cause a shift in demand -> Market Failure (Demand doesn't equal supply).

Prices will then actually rise to try to dampen the increase in demand but it may also cause a temporary shortage of the commodity as suppliers cannot supply enough to meet the demand.

An example of this effect in overdemand happened in China: Check out this article: 2011 salt

Hope this helps
 

[Klexos]

Hi Klexos!

Inflation is the gradual increase in prices of commodities- Now Inflationary expectations happens when consumers anticipate a rise in price (This could be because of anticipated supply shortage, seasonal, rumours etc.). When this occurs, consumers will usually buy more in order to "escape" the anticipated rise in price. This will cause a shift in demand -> Market Failure (Demand doesn't equal supply).

Prices will then actually rise to try to dampen the increase in demand but it may also cause a temporary shortage of the commodity as suppliers cannot supply enough to meet the demand.

An example of this effect in overdemand happened in China: Check out this article: 2011 salt

Hope this helps

Thanks for the reply! So regarding Australia, I'm reading a lot on lower inflationary expectations and its correlation to why the RBA has eased the monetary policy in May 2016 or something to 1.75%, is this because they want to encourage consumption and investment through having lower borrowing costs because the lower inflationary expectations in a way has made the economy (household and all) more cautious with spending?

[Spencerr]

Thanks for the reply! So regarding Australia, I'm reading a lot on lower inflationary expectations and its correlation to why the RBA has eased the monetary policy in May 2016 or something to 1.75%, is this because they want to encourage consumption and investment through having lower borrowing costs because the lower inflationary expectations in a way has made the economy (household and all) more cautious with spending?

The RBA eases monetary policy in order to address forecasts of inflation. By easing the cash rate in the overnight money market, and via the transmission mechanism, they hope to lower interest rates across the entire economy (by encouraging the commericla banks to pass the cuts down to consumers). And one of the impacts of such is to encourage consumption (either by increasing disposable income or reducing the opportunity cost of spending now i.e. the intertemporal substitution effect) and investment (by reducing the costs of investment). The lower inflationary expectations has not really made households more cautious with spending, infact things are cheaper than ever now. The reason why inflation is so low is because world inflation is low, wage growth is weak, and also prices are dropping.
World inflation is weak partly because of slowing global demand, sluggish growth and also something interesting, currency wars!!!!!!!!!!

[Klexos]

The RBA eases monetary policy in order to address forecasts of inflation. By easing the cash rate in the overnight money market, and via the transmission mechanism, they hope to lower interest rates across the entire economy (by encouraging the commericla banks to pass the cuts down to consumers). And one of the impacts of such is to encourage consumption (either by increasing disposable income or reducing the opportunity cost of spending now i.e. the intertemporal substitution effect) and investment (by reducing the costs of investment). The lower inflationary expectations has not really made households more cautious with spending, infact things are cheaper than ever now. The reason why inflation is so low is because world inflation is low, wage growth is weak, and also prices are dropping.
World inflation is weak partly because of slowing global demand, sluggish growth and also something interesting, currency wars!!!!!!!!!!

Yup! I get how the inflation part works Thank you!

Sorry for like being still confused - but how does this all relate to inflationary expectations?

[brontem]

Yup! I get how the inflation part works Thank you!

Sorry for like being still confused - but how does this all relate to inflationary expectations?

All inflationary expectations are is the expected price change for items - if we're worried prices will go up in the future, we'll buy more now. If we think prices will go down in the future, we'll wait, and buy less items now.
The RBA uses pre-emptive monetary policy to smooth this out. If the  To reduce inflation the RBA can increase the cash rate, leading to a rise in interest rates. Borrowing $$ is more expensive and people will save more and spend less, meaning AD slows down, and inflation will slow as well.

[Klexos]

All inflationary expectations are is the expected price change for items - if we're worried prices will go up in the future, we'll buy more now. If we think prices will go down in the future, we'll wait, and buy less items now.
The RBA uses pre-emptive monetary policy to smooth this out. If the  To reduce inflation the RBA can increase the cash rate, leading to a rise in interest rates. Borrowing $$ is more expensive and people will save more and spend less, meaning AD slows down, and inflation will slow as well.

Thanks for the help! Definitely cleared up all the confusion