The recent surge in inflation may have a long-lasting impact on the younger generation, causing them to fear rising prices, according to new research. Young people in the UK, who are experiencing double-digit price growth for the first time, are more likely to expect high inflation to continue in the future, analysis of Bank of England (BOE) data by Bloomberg has found. This could pose a challenge for policymakers, who are attempting to achieve a 2% inflation target by discouraging workers from demanding higher wages.
“Inflation expectations have gone up a lot among young people,” stated Michael Saunders, senior adviser at Oxford Economics and former Bank of England rate-setter. He added, “It’s reasonable to expect there will be some scarring on inflation expectations. The young, who thought that high inflation would mean 2% or 3%, might now have a much wider range of expectations of where inflation could be.”
Historically, younger generations have had lower inflation expectations compared to older age groups who remember the periods of high inflation in the 1970s and 1980s. However, the analysis of UK data reveals that inflation expectations among those aged 16 to 24 in Generation Z have increased more than any other age group since the pandemic and the war in Ukraine triggered a surge in prices.
Similar evidence from Europe suggests that the impact of high inflation can be passed down through the generations, while research focused on the US Federal Reserve indicates that even central bankers are influenced by their experience of inflation.
This research highlights the importance of understanding how inflation expectations are shaped and how a significant period of higher prices can alter people’s thinking. Inflation expectations play a significant role in determining wage demands and price setting by companies. Therefore, policymakers face the challenge of keeping these expectations anchored around the 2% target.
Economists refer to this phenomenon as the “experience effect”, where individuals who have lived through volatile and high price growth in the past are more deeply affected by those memories than those who have only learned about it from history books. Ulrike Malmendier, a professor of economics at the University of California in Berkeley, conducted research showing that dramatic economic experiences, such as high inflation and spikes in unemployment, have a lasting impact on individuals’ beliefs for years to come.
More detail via The Straits Times here… ( Image via The Straits Times )