In economics it is important to understand the concept of adaptive expectations. We all form expectations about prices and inflation, but there is more than just simple expectations. These expectations guide our behaviors in many domains. If we expect a drastic price change for goods and/or services we shall most likely modify our behavior in response. We might want to advance a purchase to take advantage of currently lower prices in the expectation of higher costs later on. Most people would follow the price changes on a regular basis and adapt their expectations according to the updated information. It is an important process as there are millions of people who do this and this process drives price levels in many countries. In Europe we would like to see not only inflation, but also expectations about inflation to be around the target level of 2% per year. After the high price rises of energy and food (Putin’s war) as well as the disrupted supply chains (Covid-19 crisis) we were unsure, whether we would have to adapt our expectations for the coming years. The credit crunch in the last few years forced people to adapt spending plans and expenditures. We seem to have overcome these major crises due to rapid adaptive expectations. The crucial mechanism to achieve this is a timely and open communication of changes. Media have a role to play to not only spread the information, but to explain underlying reasons. This contributes to a widespread understanding of basic economic principles that helps countries to navigate stormy weather. It is like players of chess who adapt their strategy after the other player has acted or not according to their expectations. It’s simple, isn‘t it?
