eichengreen163_Kent Nishimura  Los Angeles Times via Getty Images_federal reserve Kent Nishimura Los Angeles Times via Getty Images

America's Not-So-Great Inflation

The acceleration of US inflation in recent months has led many alarmed observers to point to parallels with the 1970s, when commodity prices shot up, the US Federal Reserve fell behind the curve, and inflation expectations became unmoored. In fact, today's circumstances could not be more different.

BERKELEY – It has become abundantly clear that the United States has an inflation problem. What is not yet clear is how big the problem will turn out to be and how long it will last.

Alarmed observers point to parallels with the 1970s, when commodity prices shot up, the US Federal Reserve fell behind the curve, and inflation expectations became unmoored. Consumers, producers, and workers all expected prices to keep rising at the same or even an accelerating pace. Accordingly, households adjusted their spending, unions their wage demands, and businesses their prices, triggering an inflationary spiral.

Today, in contrast, inflation expectations remain firmly anchored. The Michigan Survey of Consumers shows that respondents expect inflation to approach 5% over the coming year, before falling back to just above 2% in the subsequent four years. The inflation rate implicit in the price of five-year inflation-indexed Treasury securities shows basically the same thing: inflation averaging 2.8% over the next five years. We can infer that expected inflation for the years 2023 to 2026 is below this five-year average, given the expectation of 5% for 2022. There is no sign of the ship dragging anchor, in other words.

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