Can higher expected inflation lead to higher actual inflation?
Yes
Inflation expectations can become self-fulfilling. While some prices can change quickly, others are adjusted infrequently. Producers set prices based on likely future costs and market expectations. Similarly, labor contracts are not renegotiated frequently; negotiations typically lock in wages or salaries for one or more years at a time. If people expected the 2021 inflation rate to continue into the future, a 7% rise in prices would become “built in” as future prices are set and wage and salary contracts are negotiated. This will cause inflation to persist even when the economy is no longer “overheating.” Rising inflation expectations are largely to blame for the persistence of inflation in the 1970s, which remained elevated well after the booms of that period had run their course.
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Sources:
EconoFact Thinking Can Make It So: The Important Role of Inflation Expectations
Federal Reserve Bank of Cleveland Are Some Prices in the CPI More Forward Looking Than Others? We Think So.
FRED (Federal Reserve Bank Of St. Louis) Consumer prices and unemployment, 1963-1978
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