After two back-to-back interest rate hikes by the Reserve Bank of Australia (RBA) in February and March, all eyes are on the next policy meeting set for May.

While much attention tends to focus on current inflation, the central bank’s latest decision on Tuesday highlights another concern: what people think inflation will be in the future.

In its statement, the RBA noted that “short-term measures of inflation expectations have already risen” and warned “there is a material risk that inflation will remain above target for longer than previously anticipated”.

This matters, because inflation is not just about what prices are doing today. It is also shaped by what households and businesses expect prices to do in the future.

What are inflation expectations?

Put simply, inflation expectations are beliefs about how quickly prices will rise over the next year or two.

Economists track these beliefs in several ways. In Australia, one widely watched measure comes from the Melbourne Institute, which surveys households about their expectations for inflation over the next 12 months.

These expectations are not just abstract numbers. They influence real decisions.

If households expect prices to rise quickly, they may bring forward spending to avoid higher costs later. Businesses may increase prices in........

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