Is inflation actually what we think?

Inflationary expectations can be an important determinant of the actual level of inflation and so the Bank of England monitor people’s perceptions of inflation closely. Expectations of inflation are currently at their highest level in eight years.


1. Explain the transmission mechanism by which higher inflationary expectations are translated into inflation.
2. What are the key determinants of inflationary expectations?
3. Discuss strategies that (a) the Bank of England and (b) the government can adopt to reduce inflationary expectations.