Central banks in advanced economies generally expect inflation to fall back down to about 2-3% in the next couple of years. However, the recent track-record of these forecasts has been spotty at best, and economists have increasingly struggled to account for both its persistence and the resilience of job markets even as economies slow.
In a research brief published today, we posit that this is because their theories of inflation are flawed. Eschewing conventional demand-focused models of inflation, we propose an alternative approach to the topic which factors in labour costs to produce a different set of projections. We project that inflation will remain elevated much longer than expected, and may not settle below 3-4%. At the same time, employment will remain more robust than during similar phases of previous disinflation. The decline in consumption necessary to cool inflation will consequently depend more heavily than in past tightening phases on the reverse wealth effect of falling asset values.
You can download the research brief here.