Do inflation expectations matter?

We have long been sceptical of the conventional view that inflation expectations have been an important determinant of inflation in advanced economies. At the same time, though, we doubt that expectations are as ‘anchored’ at low levels or at central bank targets as is often assumed. So, while expectations haven’t contributed to higher inflation for decades, they could do so in future if the conditions are right. The longer that inflation stays high against a backdrop of tight labour markets, the greater the threat that expectations spring to life and drive inflation higher. The risk of this happening soon is greatest in the US.