Central bankers worldwide are raising alarms over the persistent threat of inflation resurgence, driven by lasting “scars” on households from the sharp price increases following the pandemic. According to a recent report by the Bank for International Settlements (BIS), households across 29 advanced and emerging economies currently expect inflation to average around 8 percent over the next year—significantly above the present global inflation rate of approximately 2.4 percent.
These elevated inflation expectations risk becoming “unmoored” from central banks’ official targets, potentially triggering a self-reinforcing spiral of wage demands and price hikes, the BIS warns. “Households are very much influenced by recent inflation experience; when it comes to inflation expectations, it’s once bitten, twice shy,” said Hyun Song Shin, head of the BIS’s Monetary and Economic Department, in remarks reported by the Financial Times. He emphasized that while households often overestimate real inflation, if such perceptions influence economic behavior, they could seriously impact economic stability.
In response to easing inflation, central banks have started trimming interest rates after grappling with the worst price surge in a generation. The International Monetary Fund forecasts inflation in advanced economies to fall to 2.2 percent next year—down from over 7 percent in 2022—while emerging economies are expected to see a decline to 4.6 percent from nearly 10 percent. However, officials remain cautious about the long-term effects of post-pandemic inflation, which was further aggravated by soaring energy prices after Russia’s invasion of Ukraine, along with spikes in other commodities.
The Financial Times highlights how trade tensions, particularly tariffs introduced during former President Donald Trump’s administration, add complexity to the outlook. The Federal Reserve has kept monetary policy steady this year, wary that the highest tariffs in decades might push consumer prices higher. The BIS cautions that what were once seen as “temporary” inflation spikes could entrench higher inflation expectations, complicating central banks’ missions.
Agustín Carstens, BIS general manager, stressed the delicate balancing act facing policymakers: “Households, in particular, may show less tolerance for price increases and real wage declines following the sharp rise in living costs after the pandemic.” He urged swift and forceful action if inflation expectations become de-anchored, warning that uncertainties around tariffs further complicate the task.
US Federal Reserve Chair Jay Powell echoed these concerns in testimony to the Senate banking committee. While he maintained that a prolonged tariff-induced inflation shock is not the base case, Powell acknowledged the risk that memories of post-pandemic inflation might hinder efforts to bring prices back to the Fed’s 2 percent target.
Notably, inflation expectations among US households spiked following the introduction of reciprocal tariffs in April 2018, reaching levels last seen in the early 1990s, according to University of Michigan surveys. Although expectations have softened with easing US-China trade tensions, they remain well above the Fed’s goal. Market-based measures, however, continue to suggest that investor expectations remain anchored.
Meanwhile, the Bank of England recently highlighted elevated inflation expectations among households and businesses as a significant risk, compounded by concerns over potential oil price shocks from the ongoing Middle East conflict.
The Financial Times’ reporting underscores that, despite easing headline inflation, central banks remain vigilant, recognizing that the post-pandemic “scars” and geopolitical risks may continue to challenge global price stability for some time.
