Losing the anchor of inflation


Monetary policy makers trying to judge whether high inflation this year will persist should – taking into account lessons from the US and overseas past – closely monitor inflation expectations, a document suggests. which will be discussed at the Brookings Papers on Economic Activity (BPEA) conference on September 9.

The author, Ricardo Reis of the London School of Economics, examined consumer, professional forecasters and market expectations for inflation in the United States in the late 1960s and early 1970s (when the inflation started to rise), in the early 1980s (when inflation stabilized) and during the COVID-19 pandemic. He also watched episodes in Brazil and South Africa between 2010 and 2016, and in Turkey after 2017.

“If inflation expectations rise, households will buy more goods today, savers will shy away from nominal assets [such as bonds], workers will demand higher wages and companies will post higher prices, which will lead to higher inflation, ”he writes in Losing the anchor of inflation. And he warns that “if expected inflation increases, only a deep recession can keep inflation low.”

He likened trying to anticipate future inflation to sitting on a beach trying to determine, before it was too late, whether a boat was pulling away from shore, and compared the anticipation gauges of ‘inflation to “a grainy image of the anchor of the boat”.

After reviewing the data on expectations for last year and this year, he concludes that “the jury is out on whether inflation is going to go away.” He finds reasons for some concerns in household surveys, but says policymakers still have time to react.

The article begins by focusing on the American experience between 1965 and 1974. Current widely used expectation indicators, such as the University of Michigan Monthly Consumer Surveys and Inflation-Indexed Treasury Securities , did not exist then.

However, Reis looked at rarely used data, including a short-lived quarterly precursor to the Michigan surveys and the gold futures market in Zurich, Switzerland. He concludes that inflation expectations in the United States began to rise as early as 1967. Had the rising expectations and their importance been recognized sooner, Fed policymakers might have considered acting more forcefully. to cushion inflation. The Fed did not bring inflation and expectations under control until, under President Paul Volcker, it undertook a very restrictive monetary policy between 1979 and 1983.

In more recent episodes, policymakers in Brazil, observing that inflation in 2010 was on target, cut interest rates sharply in 2011. But inflation was only temporarily contained due to government controls on gasoline and diesel prices, and expectations became groundless between 2011 and 2016 In Turkey, political pressure on the central bank by President Recep Erdogan in the run-up to elections had ended. 2017, denied inflation expectations. Real inflation jumped in 2018 and 2019.

South Africa between 2010 and 2016 offers a counterexample. Real inflation pushed all the way to the upper limit of the central bank’s target, but – citing temporary shocks to food and electricity prices – it did not tighten monetary policy significantly. The data shows that expectations have remained anchored and that inflation has calmed down.

Reis writes that it is too early to say whether inflation expectations in the United States are now receding, as they did in the late 1960s, or whether they will remain anchored despite temporary price shocks. keys, as they did in South Africa. Professional forecasters have only slightly raised their inflation expectations for the United States. Market expectations have risen significantly this year, but only after dropping in 2019 and 2020. Household expectations, however, have risen faster in just six months than at almost any other time since the 1980s.

“Inflation is going to be quite high in 2021. Whether it’s a brief hit or whether inflation is going to get out of hand depends on expectations, and there are currently worrying signs in the data,” he said. he said in an interview with The Brookings. Institution. “Ultimately, expectations depend on what politics will do in the next few months: Will the FOMC let the anchor drift or not? “


Reis, Ricardo. 2021. “Losing the inflation anchor.” BPEA conference project, fall.

Disclosure of conflicts of interest

Ricardo Reis’ research is supported by a 5-year grant from the European Research Council. Other than the above, the author has not received financial support from any company or person for this article or from any company or person with a financial or political interest in this article. They are not currently an officer, director or board member of any organization interested in this article.


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