The current inflationary process is a global phenomenon, but emerging and developing countries have been growing significantly faster than the rest of the world. Because there is no reason to believe that world production will rise miraculously at least in the immediate future, many people expect that prices will keep on rising. These expectations in turn exacerbate the inflationary process. Households buy more of nonperishable goods than they need for their immediate consumption because they expect prices to go up even further. What is worse is that traders withhold stocks from the market in the hope of being able to sell these at higher prices later on. In other words, expectations of higher prices become self-fulfilling.
Explain and draw a graph to illustrate how inflation and inflation expectations “become self-fulfilling.”