The effects of expectations on changes in the price level

•  If workers expect future inflation, they are more likely to bargain for higher wages to compensate for the increased cost of living.
• What are workers going to bargain for if they expect future inflation?

  Higher wages
•  If workers can successfully bargain for higher wages, this will contribute towards inflation
• What will higher wages contribute towards?

  inflation
• Higher wages will:

  • increase cost push inflation (wages increase firms costs)
  • Increase demand pull inflation ( as workers have more disposable income)
• What two types of inflation will occur if wages are increased?

  cost push and demand pull
• Also, if firms are expecting inflation to rise (e.g. expecting the price of raw materials to increase) then they will be more likely to increase prices to protect their profit margins.
• What will firms do if they are expecting inflation to rise?

  increase their prices