The Ghost of Inflation Future

Of all the problems afflicting the world economy nowadays, inflation may seem like the least of our worries. But an understanding of how the Great Inflation of the 1970's was tamed offers important lessons for addressing today’s economic challenges, however different they may be.

DIJON – With all of the problems afflicting the world economy nowadays, inflation seems to be the least of our worries. In addressing the post-2008 economic malaise, which stems from over-indebtedness, policymakers are correct to focus on the threat of debt deflation, which can lead to depression.

But dismissing inflation as “yesterday’s problem” could undermine central banks’ efforts to address today’s most pressing issues – and, ultimately, facilitate inflation’s resurgence. Understanding how the Great Inflation from the late 1960’s to the early 1980’s was tamed offers important lessons for addressing far-reaching economic problems, however different ours may be, and provides insight into the dangers that may lie ahead.

The first useful lesson concerns expectations. In the decades following World War II, the doctrine that inflation needed to be traded off against employment – based on the relationship that William Phillips described in 1958 – dominated economic thinking. But the Phillips curve fared poorly in the 1970’s, when many countries experienced “stagflation” (high levels of both inflation and unemployment).

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