The success of inflation targeting depends on the central bank’s ability to anchor public inflation expectations. If the public trusts the central bank to defend its target, expectations remain stable, minimizing the economic damage caused by temporary supply shocks.

[Adaptive/Backward-Looking Expectations] -> Markets base choices on past inflation logs
  |- [Rational Forward-Looking Models] ----> Markets build views using available economic data
       |- [Firmly Anchored Targets] ---------> Markets trust the central bank's stated target index

When inflation expectations become unanchored or backward-looking, workers demand wage hikes to cover past price increases, and companies raise prices to clear expected costs. This self-fulfilling loop creates an inflation spiral that requires aggressive interest rate hikes to break.