These expectations influence longer-term interest rates and asset prices as well as the public’s views concerning the likely future paths of income and inflation. The history of oil price shocks is a good example to illustrate this point.
In the 1970s, two large oil price shocks led to sharp increases in general inflation that were not met with prompt inflation-fighting actions by the Federal Reserve. This delay left the public unsure whether the Federal Reserve would act to reverse the increase in inflation, and expectations of longer-term inflation ratcheted up.