Question

Why are central banks so concerned with inflation expectations?

Short answer

Central banks are so concerned with inflation expectations as they influence the consumption habits of enterprises and consumers.

Step-by-step solution

Step 1. Define inflation.

Inflation is defined as a broad, gradual increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency purchases fewer products and services; hence, inflation equates to a loss of money's purchasing power.

Step 2. Why are central banks worried about inflation expectations?

Central banks are worried with inflation expectations because they influence the consumption habits of enterprises and consumers, which in turn affects the economy's stability.

When inflation expectations grow, the short-run aggregate supply curve shifts upward, resulting in higher short-run actual inflation in addition to any inflationary impacts that may occur.