Editing Inflation (section)

===Inflation expectations===

Inflation expectations or expected inflation is the rate of inflation that is anticipated for some time in the foreseeable future. There are two major approaches to modeling the formation of inflation expectations. [[Adaptive expectations]] models them as a weighted average of what was expected one period earlier and the actual rate of inflation that most recently occurred. [[Rational expectations]] models them as unbiased, in the sense that the expected inflation rate is not systematically above or systematically below the inflation rate that actually occurs.

A long-standing survey of inflation expectations is the University of Michigan survey.<ref>{{cite web|url=https://fred.stlouisfed.org/series/MICH|title=University of Michigan: Inflation Expectation|date=January 1978|publisher=Economic Research, Federal Reserve Bank of St. Louis|access-date=March 9, 2017|archive-date=November 7, 2021|archive-url=https://web.archive.org/web/20211107075130/https://fred.stlouisfed.org/series/MICH|url-status=live}}</ref>

Inflation expectations affect the economy in several ways. They are more or less built into [[nominal interest rate]]s, so that a rise (or fall) in the expected inflation rate will typically result in a rise (or fall) in nominal interest rates, giving a smaller effect if any on [[real interest rate]]s. In addition, higher expected inflation tends to be built into the rate of wage increases, giving a smaller effect if any on the changes in [[real wages]]. Moreover, the response of inflationary expectations to monetary policy can influence the division of the effects of policy between inflation and unemployment (see [[monetary policy credibility]]).