The return of inflation

Most economists and central bankers would have us believe that long-term inflation is a technocratic problem that has long been solved. Indeed, today’s millennials and Gen Z have experienced more grade inflation than price inflation, and don’t really understand what all the fuss is about. Markets, which are never terribly good predictors of major turning points in the economy, don’t seem at all worried, either, as measured by the levels of expected inflation implicit in inflation-indexed Treasury bonds. What might everyone be missing?

The problem is that controlling long-run inflation is fundamentally a political-economy challenge, not a technocratic one. There is rarely a moment where governments find it convenient to pay higher interest rates on their debts, or where stock markets clamour for tighter monetary policy to keep prices from getting too frothy. People forget that back in the 1970s, before the advent of modern independent central banks, inflation in the United States reached 13 per cent.