Category: Prices & interest rates
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Central banks were widely criticised for reacting slowly to the 2022 inflation surge. New research suggests that a measured response to a food and energy shock was broadly the right call. Hiking interest rates hard to hit the inflation target faster would have cost jobs and incomes for little gain.
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How households and firms react to macroeconomic shocks will vary depending on their own circumstances. New research shows the value of understanding who responds most – and illustrates it with variations in firms’ financial health and their investment decisions after an unexpected interest rate cut.
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Policy-makers at central banks often use financial markets to make predictions about inflation. But research suggests that market movements are often disconnected from real-world beliefs about future price changes, on occasion leading to misguided policy decisions.
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In the wake of soaring prices in 2022, people’s long-term expectations for future inflation rose sharply. This jump was mostly caused by the sheer size of the surprise, not by a belief that rising prices were here to stay. In contrast with the 1980s, today’s inflation expectations remain anchored.
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The inflation of 2021-23 has reignited debate among economists about the impact of labour market tightness on inflationary pressures – a connection long known as the Phillips curve. New research warns that assuming a nonlinear relationship could lead to significant policy mis-steps.
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Modern consumers are used to a flood of options whenever they are shopping for something. Whether it’s car insurance or fizzy drinks, there are endless brands from which to choose. But many brands are owned by the same firms – and this affects how suppliers set their prices.
