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Causes of inflation – inflation expectations Rising expectations of inflation can often be self-fulfilling. If people expect prices to rise, they will want higher pay rises to protect the real purchasing power of their incomes. For example a booming economy might see a rise in inflation from 3% to 5% due to an excess of AD. Workers will seek to negotiate higher wages and there is then a danger that this will trigger a ‘wage-price spiral’ that then requires the introduction of deflationary policies such as higher interest rates or an increase in direct taxation. |