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Published: August 19, 2022

How inflation expectations can backfire & how to set them straight

What do you think will happen with inflation over the next year?

Do you think prices will start to come down soon?

Probably not if you’re like a lot of folks.

In fact, many think things will get worse before they get better.1

And that, unfortunately, could become a self-fulfilling prophecy.2

How?

Well, let’s say you own a business, and you anticipate prices will go up. You’re going to raise your prices to get ahead of rising costs.

As prices go up, your employees notice they can’t buy as much with their current wages. So, they’re going to want you to pay them more.

And they’re going to move quickly to buy things now, before prices go up even more in the future.

That means you can’t keep products stocked.

So, you raise prices again to keep up with higher wages and more demand.

Now, once again, folks can’t afford as much with their current wages, so they’re going to want higher pay. And that ends up causing a vicious wage-price spiral.

Why should we care?

Because our inflation expectations can have real power.2

And they can work against us if we don’t base them on the facts about inflation.

Want to see how much you really know about inflation? Click here to take a 2-minute true/false quiz on inflation.

P.S. How do you keep a level head when you’re feeling uncertain or pessimistic about finances, the markets, or the future? What’s the last difficult call you or a loved one had to make because of inflation? Hit “comment” and tell me. I’d love to hear how you’ve managed your expectations and reactions to inflation.

1 - https://www.cnbc.com/2022/04/05/inflation-fears-force-americans-to-rethink-financial-choices.html

2 - https://www.forbes.com/advisor/investing/inflation-expectations/

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