How Expectations Move Markets

Why what people expect about future prices can change supply and demand today, sometimes making those expectations come true.

Supply and demand depend not only on today’s prices and incomes, but also on what people expect will happen in the future. Expectations can shift supply and demand curves and move prices before anything else changes.

Expectations and demand

If buyers expect prices to rise, they may buy more now to avoid paying more later. This shifts demand to the right today, pushing prices up. If they expect prices to fall, they may wait, reducing demand today.

Expectations and supply

If sellers expect prices to rise, they may hold back goods to sell later at a higher price, reducing supply today. If they expect prices to fall, they may rush to sell now, increasing supply.

Self-fulfilling expectations

Expectations can become self-fulfilling. If many people expect a shortage and rush to buy, they create the very shortage they feared. This is what happened with panic buying of items like toilet paper and flour at the start of the COVID-19 pandemic in 2020.

Expectations also play a role in financial markets and housing. If people expect house prices to keep rising, they may buy more eagerly, pushing prices higher, until expectations change.

Rumours of a salt shortage

In 2016, rumours of a salt shortage spread in parts of northern India. People rushed to shops to buy salt, and prices jumped sharply in some places, even though there was no real shortage. Authorities issued statements that stocks were ample, and prices soon returned to normal. The rumour alone had temporarily moved demand and prices.

Speculation

Some traders buy goods or assets purely because they expect prices to rise, called speculation. Speculation can help markets by moving goods from times of plenty to times of scarcity, but excessive speculation can amplify price swings.

Role of information

Clear, credible information from governments and businesses about supplies can calm expectations and prevent panic. Central banks also try to manage inflation expectations for this reason.

Thinking prices only respond to current conditions

Prices often move on news about the future, such as expected harvests, policy changes or shortages. Understanding expectations helps explain price changes that seem to happen before anything tangible changes.

Key takeaways

Expectations about future prices shift supply and demand today.
Expecting higher prices raises demand and can reduce supply now.
Expectations can be self-fulfilling, as with panic buying.
Clear, credible information can calm expectations and prevent panic.