Long-term inflation expectations remain “quite stable” as the world economy recovers from the credit crisis, suggesting confidence in central banks to deliver constant prices, according to a study by economists at the Bank for International Settlements.
While measures of long-term uncertainty about inflation are now higher than before the crisis, they are stable and “in this regard, central-bank credibility seems to remain high,” said the economists at the Basel, Switzerland-based institution.
“This could change if policy makers are seen to be slow in responding to unexpected increases in inflation, which in turn could trigger rapid upward revisions in inflation expectations,” Petra Gerlach, Peter Hoerdahl and Richhild Moessner said in the study, published today. “At the same time, in many mature economies, any premature tightening could jeopardize the economic recovery and risk sparking expectations of deflation.”
Central banks seek to anchor inflation expectations to ensure companies and workers don’t begin to bet on mounting price pressures and seek compensation through higher wages or prices, triggering an inflation spiral.
The fact that long-term expectations are higher than before the crisis “could raise questions about how firmly expectations are anchored,” the economists said. They also noted that there “is a risk that low headline inflation expectations may become entrenched” in the U.S.
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