How increased inflation influences the behavior of economic actors. It is commonly believed that people borrow more during high inflation because they wish to have more cash to buy goods and services in case prices continue to rise. Prices then rise anyway because of the increased cash in circulation and higher demand for goods and services. In other words, inflationary psychology predicts that inflation can become self-perpetuating. See also: Behavior Economics.
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Consumers' belief that prices will inevitably rise, a belief that drives them to speed up purchases especially of real assets (that is, gold, diamonds, and real estate) and avoid investment in financial assets (that is, stocks and bonds). As a result, the consumers themselves can cause the inflation that they fear will occur.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.