Annualized inflation was more than 7% last month, and 9% the month before. It is still unclear if this is temporary (as the Fed argues, or is hoping) or is more permanent. Economists think inflation is driven by expectations. If people expect inflation they increase prices and demand higher wages, and then expectations are realized. The figure below from the New York Fed plots inflation expectations by age. Older Americans, who have more experience with high inflation and are more likely to live on fixed income, anticipate more than 5% inflation in the next year. Americans under 40, who have never lived with high inflation, expect it will only be about 3%. Older Americans normally expect higher inflation, but the expectations by age have diverged more in the last year. We'll see who is right.
Allison Schrager is a senior fellow at the Manhattan Institute. Follow her on Twitter here.
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