"When people begin anticipating inflation, it doesn't do you any good anymore, because any benefit of inflation comes from the fact that you do better than you thought you were going to do"

In this quote, Paul A. Volcker, a former Chairman of the Federal Reserve, addresses the subtle yet intricate relationship between inflation and financial expectations. The essence of his statement revolves around the effect of awaited versus unanticipated inflation.

Inflation, by definition, is the rate at which the general level of rates for goods and services increases, resulting in a decline in the purchasing power of currency. At moderate levels, inflation can stimulate financial activity, as customers are most likely to purchase products and services with the expectation that costs will increase in the future. When inflation is unanticipated, it can offer short-term benefits to particular sectors of the economy. For example, customers may find it easier to repay their debts with devalued currency, and businesses may experience a short-lived increase in revenues as rates rise before wage modifications capture up.

However, Volcker highlights a critical point: the role of expectations. When inflation is anticipated, it stops to provide these economic benefits. This is because, with expected inflation, agents within the economy change their habits accordingly. Workers require greater salaries to match expected price boosts, companies raise prices preemptively, and lenders adjust interest rates to represent the awaited inflation. As a result, the self-fulfilling nature of these expectations can speed up inflation without the accompanying economic advantages.

In essence, Volcker suggests that the true "advantage" of inflation-- where you economically outperform expectations-- is nullified as soon as inflation ends up being predictable. This inevitably leads to a cycle where expectations cultivate further inflationary pressures, promoting instability rather than growth. Volcker's insights highlight the requirement for cautious management of inflationary policy and expectations to keep economic stability. Anticipated inflation can deteriorate the financial growth it initially planned to promote, thereby challenging policymakers to balance inflation with affordable unpredictability to enhance economic outcomes.