Is Inflation Alive?

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Inflation in most rich countries has been low since the 1990s, not least because of central banks’ success in lowering long-term inflation expectations. But today’s policymakers must weigh how far they can go in trying to engineer a post-pandemic recovery without unanchoring these firmly entrenched beliefs.

In this Big Picture, UBS Group AG Chairman Axel A. Weber warns that the pandemic – and expansionary fiscal and monetary policies in particular – could trigger higher inflation than many currently expect. But Harvard University’s Kenneth Rogoff thinks that markets are probably too concerned about short-term inflation risks for 2021 – and not concerned enough about the longer-term dangers stemming from threats to central-bank independence and globalization.

Rogoff’s Harvard colleague, Robert J. Barro, adopts a similar long-term perspective, warning that the US Federal Reserve is overconfident of its ability to maintain low long-term inflation expectations – the legacy of former Fed Chair Paul Volcker – in the face of excessive government spending. But economist Claudia Sahm supports the Fed’s decision to prioritize job growth over price stability for the time being, and explains why this stance could benefit lower-income communities in particular.

Finally, Princeton University’s Harold James and Markus Brunnermeier and Sciences Po’s Jean-Pierre Landau invoke the pre-Volcker 1970s, arguing that whether long-term inflation expectations remain subdued will depend on how confident people are that the current exceptional circumstances will end.

Featured in this Big Picture

AXEL A. WEBER

 KENNETH ROGOFF

 ROBERT J. BARRO

 CLAUDIA SAHM

 ELMIRA BAYRASLI

 HAROLD JAMES

 MARKUS BRUNNERMEIER

 JEAN-PIERRE LANDAU