Also known as Expected Inflation,
Projected Inflation occurs when consumers and economists both plan upon the existence of inflation. It is this expectation which gets reflected in these economic decisions taken by these groups of economists and customers.
Relation between the Expected or Projected Inflation and the Phillips Curve:
- Together with the natural unemployment rate, Projected Inflation helps in the determination of the location of the Phillips Curve, when it is drawn on a graph with inflation on the vertical axis and unemployment on the horizontal one. In fact, it is the expected inflation rate which immensely helps in deciding the location of the Phillips Curve.
- It is required that the Phillips Curve should cross through that point on the graph, at which the Expected Inflation is assumed to be equivalent to the real inflation, as well as the real unemployment rate is presumed to be equal to the natural unemployment rate. The slightest shift in the natural unemployment rate leads to a shift in the Phillips Curve, either to the right or the left hand side. Again, a shift in the Expected Inflation will cause the Curve to move in the upward or downwards direction.
The effects of Expected Inflation are immense on the monetary policy. In fact, in recent times, the expectations from inflation have become more stabilized than what it was in the past.
Keeping the inflation expectations controlled, forms the primary concern of the central banks. This is because high inflation expectations encourage changes to take place in the economic behavior, imposing costs on the economy of a nation. An escalation in the inflation expectations can also facilitate the perpetuation of an temporary price hike, thereby making the process of maintaining price stability, all the more difficult to attain.
In order to make estimation of the inflation expectations, the economists take recourse to various sources, which include gathering information about the financial market, making consumer surveys, as well as making anticipations about future of inflation.