Abstract:
Inflation expectations are important to monetary policy decision-makers. The period of high inflation after the pandemic provides a useful context for exploring how inflation expectations influence the behaviours of firms and consumers. Using survey evidence, we examine how firms and consumers react to their inflation expectations. We find that firm price- and wage-setting behaviours were positively associated with high inflation expectations over the period. These behaviours could reinforce inflation. Consumers' spending and labour market decisions tend to show increased labour supply and reduced consumption in response to high inflation expectations, which could cool rather than reinforce future inflation.
