The long-term effects of inflation on inflation expectations

Abstract

The recent surge in inflation represents the first time many individuals experience inflation considerably above central banks’ targets. Despite limited inflation experience, inflation expectations of many households have been upward biased relative to ex-post realisations and inflation rates targeted by central banks. This column proposes inflation shocks in the more distant past as an explanation for elevated inflation expectations. Consistent with this conjecture, German households living in areas with higher local inflation during the hyperinflation of the 1920s expect higher inflation today. Long-lasting effects of inflation shocks on attitudes toward inflation have important implications for monetary and fiscal policy as managing inflation expectations becomes more difficult.