Inflationary Expectations

Notice what this means. If people expect an increase in the price level, the FC will shift leftward to exactly the expected price level. Suppose, for example, that people on the average expect 40% inflation during the coming year. This is shown in the following diagram, in which the line marked "FC₁" represents the Friedman Curve for the current year, and "FC₂'" is the Short run Aggregate Supply Curve for the coming year.

Figure 6. Inflationary Expectations

This is a symptom of "inflationary expectations," and it is one reason why inflation is so hard to stop, after it has been going on for a while.

This poses a tricky problem for the government and the monetary authorities: the problem of disinflation. Once inflation has been going on for a while, and people have inflationary expectations, how should the monetary authority handle the situation?

Disinflation