by Hassan Afrouzi, Marina Halac, Kenneth Rogoff, and Pierre Yared
CEPR
Despite the large surge in inflation across advanced economies since 2021, long-term expectations are mostly in line with central bank targets. However, this column argues that the factors which facilitated low average inflation for decades have started to reverse. These include globalisation, de-unionisation, and a deepening of the Washington consensus including especially fiscal restraint. Using a theoretical model, supported by broad empirical evidence on changing fundamentals, it demonstrates the relationship between economic and political factors, long-run inflation, and transitions between steady states. The growing tension between central banks and democratically elected politicians can make low and stable inflation more difficult to achieve in the future, with negative consequences for economic activity.