Are inflation surges persistent?

On sudden inflation spikes

In this paper Blanco et al. document stylized facts that characterize the large inflation surges observed worldwide over the last three decades. They use publicly available macroeconomic data as well as proprietary data on inflation expectations at annual frequency to measure short-term CPI inflation expectations with 1-year-ahead forecasts and long-term expectations with 5y5y-forward forecasts. Their sample includes 55 countries ( 23 developed economies and 32 developing economies for the period from 1990 to 2019. They identify four stylized facts:

• Inflation following surges tends to be persistent, with the duration of disinflation exceeding that of the initial inflation increase.
• Surges are initially unexpected but followed by a gradual catch-up of average short-term expectations with realized inflation.
• Long-term inflation expectations tend to exhibit mild increases that persist throughout disinflation.
• Policy responses are characterized by hikes in nominal interest rates but no tightening of real rates or fiscal balances.

The Dynamics of Large Inflation Surges
Authors: Julio Blanco, Pablo Ottonello, Tereza Ranosova
From: University of Michigan at Ann Arbor

What do long data reveal about the recent inflation surge

In this paper, Schmitt-Grohé and Uribe examine whether the recent spike in inflation driven by a change in its permanent component. They use a semi-structural model of output, inflation, and short-term interest rates to identify the permanent component of inflation. They then estimate the model over two periods: from 1900 to 2021 and then from 1955 to 2021. They find that:

• For the period from 1900 to 2021, the permanent component of inflation is predicted to have increased by 51 basis points between 2019 and 2021.
• For the period from 1955 to 2021, the permanent component of inflation is predicted to have increased by 238 basis points between 2019 and 2021.

The authors argue that these results could be due to the fact that the postwar period, does not contain sudden sparks in inflation, like the one observed in the aftermath of the COVID-19 pandemic, but only gradual ones, as the great inflation of the 70s took more than 10 years to build up. On the contrary, the pre-war era is rich in large and short-lived inflationary spikes, including the one around the Spanish flu pandemic of 1918.

[I]t is becoming increasingly plausible that climate change will open an era of larger economic fluctuations. Until enough data has accumulated under such new regime, the volatile pre-war period may offer useful information for understanding and forecasting business cycles to come.

What Do Long Data Tell Us About the Inflation Hike Post COVID-19 Pandemic?
Authors: Stephanie Schmitt-Grohé, Martín Uribe
From: Columbia University