Inflation expectations impact on inflation

Abstract

This literature review examines how inflation expectations impact on inflation, and if they do, could central bank try to impact on peoples’ inflation expectations to indirectly control inflation. In the theory section, I will introduce why inflation expectations affect inflation in macroeconomic models. In the inflation forecasting section, I will present four popular inflation forecasting methods and show that surveys measuring inflation expectations are the best way to forecast inflation. After that, I’ll present more recent evidence on inflation expectations impact on inflation. Finally, I suggest that by better communication central bank can impact on peoples’ inflation expectations and control inflation.