What about expected inflation? Over the long run,people don't consistently over-or under-forecast inflation, soπe=πon average. -In the short run,ne may change when people get new information. EX:Suppose Fed announces it will increase M next year.People will expect next year's P to be higher,soπe rises. This will affect P now,even though M hasn't changed yet. (continued.) CHAPTER 7 Money and Inflation slide 38CHAPTER 7 Money and Inflation slide 38 What about expected inflation? ▪ Over the long run, people don’t consistently over- or under-forecast inflation, so  e =  on average. ▪ In the short run,  e may change when people get new information. ▪ EX: Suppose Fed announces it will increase M next year. People will expect next year’s P to be higher, so  e rises. ▪ This will affect P now, even though M hasn’t changed yet. (continued.)