## History’s Inflation Lessons

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### Study and context
- Study of over 100 inflation shocks since the 1970s.
- World inflation reached historic highs in 2022 after Russia’s invasion of Ukraine, driven by disruptions to Russian oil and gas supplies and COVID supply‑chain problems.
- In advanced economies, prices rose at the fastest pace since 1984.
- In emerging market and developing economies, the price increase was the largest since the 1990s.
- Headline inflation in the United States and across much of Europe has halved from about 10 percent last year to less than 5 percent today.

### Key empirical findings
- Inflation persistence
  - Inflation is persistent; it takes years to “resolve” inflation by reducing it to the rate that prevailed before the initial shock.
  - 40 percent of countries in the study failed to resolve inflation shocks even after five years.
  - The remaining 60 percent took an average of three years to return inflation to pre‑shock rates.
- Premature loosening and relapse
  - Nearly 30 countries in the sample loosened policy prematurely after the 1973 oil‑price shock (including Denmark, France, Greece, and the United States).
  - 90 percent of countries that failed to resolve inflation saw price growth slow sharply in the first few years after an initial shock, only to accelerate again or remain stuck at a faster pace.
- Policy stance and credibility
  - Countries that resolved inflation tightened macroeconomic policies more in response to the inflation shock and maintained a tight policy stance consistently over several years (examples: Italy and Japan after the 1979 oil‑price shock).
  - Countries that did not resolve inflation had looser policy stances and were more likely to alternate between tightening and loosening cycles.
  - Policy credibility mattered: economies with more firmly anchored inflation expectations or a track record of low, stable inflation were more likely to defeat inflation.
- Labor market and wages
  - Workers’ wages have fallen in real inflation‑adjusted terms in many countries and may need to rise again to catch up with higher prices.
  - Historically, countries that resolved inflation successfully tended to have lower nominal wage growth; this did not translate into lower real wages because lower nominal wage growth was accompanied by lower price growth.
  - Implication: policymakers should focus on real wages, not nominal wages, when responding to labor‑market developments.
- External stability
  - Countries that resolved inflation were better at maintaining external stability.
  - Free‑floating currencies were less likely to depreciate sharply, and currency pegs were more likely to survive.
  - Success in fighting inflation—through tighter monetary policy and greater policy credibility—helped shore up exchange rates.
- Growth and welfare outcomes
  - Short term: countries that resolved inflation had lower economic growth than those that did not.
  - Medium and long term: five years after the inflation shock, countries that resolved inflation had higher growth and lower unemployment than economies that allowed inflation to linger.
  - Cumulative welfare losses from unresolved or permanently high inflation dominate over the medium to long term; countries that allow inflation to linger ultimately pay a higher price.

### Policy implications and recommendations
- Monetary policy
  - Maintain a consistent, tight policy stance for several years rather than tightening briefly and loosening prematurely.
  - Preserve and build policy credibility to anchor inflation expectations.
  - Recognize that fighting inflation is a marathon, not a sprint.
- Wage and labor‑market policy
  - Monitor real wages closely; avoid focusing solely on nominal wage trajectories.
  - Manage the risk of wage‑price spirals by calibrating wage growth relative to price developments.
- Fiscal policy
  - Governments should avoid adding to price pressures with loose fiscal policy.
  - To make fiscal support during a cost‑of‑living crisis less inflationary, target relief to the most vulnerable to alleviate suffering most effectively.
- Communication and consistency
  - Policymakers should persevere, demonstrate policy credibility and consistency, and keep focus on returning inflation firmly to target.

*anil ari and lev ratnovski are economists in the IMF’s Strategy, Policy, and Review Department and European Department, respectively. This article draws on IMF Working Paper 2023/190, “One Hundred Inflation Shocks: Seven Stylized Facts,” by Anil Ari, Carlos Mulas-Granados, Victor Mylonas, Lev Ratnovski, and Wei Zhao.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/december/59-61-ratnovski-final.pdf_