If the return of high inflation caught many off guard, its refusal to leave has been more shocking still—in the past week countries including America and Britain have been surprised yet again by high prices. The Federal Reserve goofed when it forecast in December 2020 that prices would rise by less than 2% in each of the following two years. It goofed on a grander scale in December 2021, when it reckoned that inflation in 2022 would be just 2.6% even though prices were already rising by more than 5% a year. But the Fed was hardly alone in its misjudgments. imf forecasts have badly and repeatedly undershot inflation. And in late 2020 this newspaper correctly judged that prices would jump in the months ahead, but concluded that the odds of a more sustained period of inflation were low.
Why, then, has inflation been so damnably persistent? In one sense, the answer is trivial: it has remained high because spending has remained high and because monetary policy has been too loose. But this is an unsatisfying answer. Policy has not been tighter because central banks did not think it needed to be (see the errant forecasts). And as inflation has persisted, policy has adjusted. Back in December 2020, the Fed thought its interest rate would remain near zero in 2023; now it expects it to rise to at least 4.6%. What is trickier to work out is why inflation has repeatedly defied forecasts. New work produced by a penitent imf takes a stab at the question. Its analysis points to three potential culprits: shocks, wages and expectations.