If a prediction of a recession causes the market to crash, can it be said that the prediction itself is part of the cause of the recession? Like a self-fulfilling prophecy?
In: Economics
Expectations – and changes in expectations – can contribute to real economic outcomes. Take, for instance, inflation. If most people expect prices to rise by, say, 8%, they’ll push (through collective bargaining etc) for wage rises of 8%. Especially in countries with large, powerful unions, they may well get the 8% (it’s only fair: if prices rise by 8%, etc). Of course, companies will seek to offset this increase in cost, and increase the price of their product by 8%. Now if enough companies do this, that means prices overall *will* rise by about 8%… exactly as expected.
Of course there’s quite a bit more to it then that (and different mechanisms at play), but inflation expectations are important enough to central banks that many of them take very careful measure of them, and also try very hard to ‘anchor’ inflation expectations. That’s one of the reasons why many central banks have adopted inflation *targets.*
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