## History's Inflation Lessons

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**Canonical URL:** [History's Inflation Lessons](https://www.imf.org/en/publications/fandd/issues/2023/12/history-inflation-lessons-ari-ratnovski)

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## Bibliographic details
- Authors: ANIL ARI, LEV RATNOVSKI
- Published: December 1, 2023

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### Overview
- A study of 100 inflation shocks since the 1970s provides the basis for the analysis.
- The 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.
- Contextual points from recent history:
  - World inflation reached historic highs in 2022 after Russia’s invasion of Ukraine triggered a terms-of-trade shock akin to that of the 1970s.
  - 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:
  - 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.
  - It took the remaining 60 percent an average of three years to return inflation to pre-shock rates.
- Patterns of premature easing:
  - Nearly 30 countries in the sample (including Denmark, France, Greece, and the United States) loosened policy prematurely after the 1973 oil-price shock.
  - 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 become stuck at a faster pace.
- Policy stance and outcomes:
  - Countries that successfully resolved inflation tightened macroeconomic policies more in response to the inflation shock and maintained a tight policy stance consistently over a period of several years (examples include Italy and Japan after the 1979 oil-price shock).

### Policy lessons and recommendations
- Consistency and credibility:
  - Maintain a tight policy stance consistently over several years rather than loosening policy after initial declines in inflation.
  - Policy credibility matters: countries where inflation expectations were more firmly anchored, or where central banks had past success maintaining low and stable inflation, were more likely to defeat inflation.
- Monetary–fiscal interaction:
  - Central bankers are on the front line, but governments must not make the task harder by adding to price pressures with loose fiscal policy.
  - To make fiscal support during a cost-of-living crisis less inflationary, governments should target relief to the most vulnerable.
- Labor market focus:
  - Remain focused on real wages, not nominal wages, when responding to developments in the labor market.
  - 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 accompanied lower price growth.
  - Watch for the risk that wage growth needed to catch up with past declines in real wages could fuel inflation or lead to wage-price spirals if too high.

### External stability and exchange rates
- Countries that resolved inflation successfully were better at maintaining external stability:
  - Free-floating currencies were less likely to depreciate sharply.
  - Currency pegs were more likely to survive.
- This pattern reflects success in fighting inflation through tighter monetary policy and greater policy credibility, rather than a prescription for currency intervention.

### Growth, unemployment, and welfare implications
- Short-term vs. medium/long-term trade-offs:
  - Historically, countries that resolved inflation had lower economic growth in the short term than those that did not.
  - Five years after the inflation shock, countries that resolved inflation had higher growth and lower unemployment than economies that allowed inflation to linger.
- Cumulative costs:
  - Cumulative welfare losses from unresolved or permanently high inflation dominate over the medium to long term.
  - Allowing inflation to linger leads to accumulating costs of macroeconomic instability and inefficiency.

### Central message for policymakers
- Fighting inflation is a marathon, not a sprint:
  - Policymakers must persevere, demonstrate policy credibility and consistency, and keep their eyes on returning inflation firmly to target.
  - History suggests that inflation’s recent decline could be transitory; policymakers should avoid celebrating too soon.

*History’s Inflation Lessons, ANIL ARI and LEV RATNOVSKI, F&D Magazine, December 2023.*

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## Content in this bundle

- **F&D:  History’s Inflation Lessons**
  - [F&D:  History’s Inflation Lessons (Markdown version)](/-/media/files/publications/fandd/article/2023/december/59-61-ratnovski-final.pdf.md){rel="alternate" type="text/markdown"}
  - [F&D:  History’s Inflation Lessons (PDF)](/-/media/files/publications/fandd/article/2023/december/59-61-ratnovski-final.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/fandd/issues/2023/12/history-inflation-lessons-ari-ratnovski_