The Unassuming Economist

In a piece for the VoxEU CEPR blog, Professors Francesco D’ Acunto of Boston College and Michael Weber of Booth School of Business, University of Chicago write about rising inflation in the times of Covid-19 pandemic, and why it may be worrisome for reasons even beyond those that we think most about. Aside from the three channels that have been discussed often (pent-up demand pressures, supply constraints, and labor shortages), they bring into focus the self-fulfilling nature of consumers’ expectations of prices that impacts inflation rates.

The natural question then is why should policymakers be concerned about households’ expectations of price levels anyway.

“The concern is that a surge in inflation expectations might become self-fulfilling. Recent research uses microdata to document that higher inflation expectations often result in higher consumer spending before prices increase. Further demand pressure given the post-COVID supply bottlenecks would push inflation even higher.” They further go on to add, “households might also demand higher wages to keep their perceived purchasing power constant based on their elevated inflation expectations.”

Click here to read the full article.