Inflation has been a hot topic of discussion in recent times, with many experts predicting its persistent nature over the coming years. The reasons behind this stickiness are manifold, ranging from perception issues to the mathematical calculations supporting higher inflation tolerances or unemployment rates.

This article delves into these reasons, providing a comprehensive understanding of why inflation is expected to remain a significant challenge.

Perception plays a critical role in shaping inflation expectations. As an analogy, fighting inflation is likened to rolling up a ball of string in one’s hand, with a single slip capable of undoing years of progress. This highlights the fragile nature of inflation expectations and how easily they can be disrupted.

For millennials, the recent surge in inflation rates has been a rude awakening, introducing them to a new economic challenge that they were previously unaware of. The legacy change in prices, resulting from this inflationary period, serves as a constant reminder of the potential risk of re-ignition.

Even if prices stop rising, their elevated levels are unlikely to come down, keeping inflation at the forefront of people’s minds.

The last decade provides a valuable lesson on the challenges of bringing inflation under control. Despite government efforts and constant discourse on inflation rates, controlling inflation does not necessarily translate to a reduction in prices. This disconnect between inflation control and price reduction is a critical aspect that needs to be understood.

The newly born inflationary perceptions contribute significantly to the battle against inflation, accounting for around 50% of the effort required. The Federal Reserve (Fed) plays a pivotal role in this battle, striving to change public opinion and manage inflation expectations.

However, if they fail to do so, the alternative is to encourage the acceptance of lower standards of living, a trend that is already underway.

The other 50% of the effort required to control inflation involves dealing with unions and fiscal spending. Both of these factors have made their presence felt, contributing to the inflationary pressures in the economy. They are in the early stages of growth, indicating that their inflationary impact is only beginning to unfold.

The Fed is acutely aware of these challenges and the need to bring inflation back to its 10-year moving average in a timely manner. Achieving an inflation rate below 2% is essential, but the options available to the Fed are limited. Attempting to do so could result in severe economic consequences or even geopolitical tensions.

The long bond yield has witnessed a significant increase, rising up to 5% and losing 50% of its buying power in just 9 months. This dramatic change underscores the severity of the inflationary challenge and highlights the need for a new base expectation of around 4% inflation. The potential for artificial intelligence (AI) to play a role in addressing this issue remains uncertain, but it presents an intriguing avenue for future exploration.

Empirical evidence suggests that the persistent stagflation of the 1970s was not primarily driven by oil prices, as commonly believed. Instead, the decoupling from gold played a more significant role in creating the prolonged period of stagnation and inflation. This historical insight provides a valuable perspective on the current inflationary environment and the potential factors contributing to its stickiness.

Inflation is expected to remain a dominant economic challenge in the coming years, influenced by a combination of perception issues, fiscal policies, and historical precedents. Understanding the role of perception in shaping inflation expectations, recognizing the challenges posed by unions and fiscal spending, and acknowledging the historical lessons from the 1970s stagflation are all crucial in navigating the sticky nature of inflation.

The journey ahead may be fraught with challenges, but a comprehensive understanding of these factors provides a solid foundation for addressing the persistent nature of inflation.

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