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Well, yes.

The simplest (zeroth-order) expectation one can have is that things will remains as they are.

The first-order approximation is that trends will stay as they are. But what trends are today depends on what the state of affairs has been in the (recent) past.

Anything more sophisticated is too complex, and probably not worth the extra effort.

So, if people have experienced inflation recently, they will assume inflation will stay constant. They can't assume both that prices and inflation will stay the same, and they choose the assumption that the trend will stay constant. And their expectation is based on recent past experience.

But expectations it is. People don't buy houses because they are more expensive now than a year ago. They buy houses because they expect them to be more expensive a year from now than they are now. And they expect them to be more expensive next year because they were cheaper last year.

Can the last politician to go out the revolving door please turn the lights off?

by Migeru (migeru at eurotrib dot com) on Wed Jun 20th, 2007 at 03:21:47 PM EST
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