The Lifetime Model of Inflation Expectations according to Ulrike Malmendier and Stefan Nagel

Regardless of the Fed’s commitment to restoring price stability, past price increases have had a lasting impression on households and businesses after five years of above-target inflation. People’s experiences arguably shape inflation expectations — and the path of future inflation — more than perceptions of the Fed’s resolve. If FOMC participants over-emphasize point estimates of inflation expectations, they risk overlooking the long-term costs of every month where inflation runs above 2%. In this episode, we talk with the University of California’s Ulrike Malmendier and the University of Chicago’s Stefan Nagel about how lifetime experiences shape economic expectations, the scarring impacts of the pandemic economy, and the implications for Fed policy.