Fiscal Events and Anchored Inflation Expectations

With inflation surging worldwide, some commentators have speculated whether inflation expectations have become unanchored. This policy note presents a framework to evaluate whether an inflationary spike is due to temporary shifts in policy or the real economy on one hand, or due to an unanchoring of inflation expectations. The model is a conventional “textbook” model, but accommodates many of the views of unanchored expectations in the existing literature. I then review several economic shocks of the past few years through the lens of the conceptual framework, with a particular focus on fiscal and other policy shocks. I find little to suggest that inflation expectations have become unanchored in the US, the UK, or Japan, although expectations are stubbornly below the central bank’s target in Japan, and above the target in the UK. In contrast, inflation expectations show substantial signs of unanchoring in some emerging market economies, particularly Brazil and Turkey.