For many people, the increase in inflation in 2021 was the first time they’d experienced sharp price rises. As the world economy recovered from COVID lockdowns, the Consumer Price Index rose 7 percent in the United States, the largest percentage change since 1981. Inflation in the United Kingdom and Japan hit 40-year highs in 2022.
This surge may have a lasting effect on economic behavior, suggests research by Tilburg University’s Fabio Braggion, University of Zurich’s Felix von Meyerinck, WHU–Otto Beisheim School of Management’s Nic Schaub, and Chicago Booth’s Michael Weber. People’s expectations about price changes can shape decisions on what, when, and how much to consume in the present, and the research suggests it may echo for decades upon decades.
The researchers draw their conclusions from a study of postwar Germany. In 1922–23, German prices shot up almost 150 billionfold , one of the worst inflation shocks on record. Looking at local inflation data from 1920 to 1924 for 633 German towns, as well as consumer sentiment surveys in the 2000s until the current day, the researchers find that people living in areas that experienced hyperinflation still had inflation expectations that were 1.4 percentage points higher than those in places that didn’t.
The researchers also performed a comparative analysis on Polish households. Some areas in present-day Poland were within the borders of Germany during the period of hyperinflation. The study uncovers a similar pattern in that analysis, with particularly pronounced effects in areas that had less migration after World War II.
“Overall, our findings hint towards a general vertical transmission of inflationary shocks across generations,” the researchers write, “and raise the concern that the recent surge in inflation will result in elevated inflation expectations around the globe for a prolonged period of time even when inflation rates will ultimately recede.”
When European adults were asked in 2022 about their inflation expectations for the upcoming year, the experience of their home country in the 1920s proved important. Even though realized inflation in 2022 was about the same for everyone surveyed, people in countries that had seen hyperinflation almost a century earlier predicted a 1.4 percentage point higher inflation rate, relative to those elsewhere, for 2023.
The findings not only confirm that inflation expectations are shaped by personal experience but also that such experiences may be transmitted across generations and persist for decades. Hypothesizing that media could be a potential source for this transmission, the researchers examined the role of local newspapers.
The inflation shock was a major story at the time, and it led to continuing coverage of inflation that shaped attitudes long after the shock subsided, they confirm. In 68,956 articles published in the business sections of 99 German newspapers from mid-2018 to mid-2021, the results follow the same geographical pattern as the surveys of households showed: nearly a century after the hyperinflation, newspapers headquartered in the affected areas printed more articles about inflation than did newspapers located elsewhere. In this way, local papers represent a collective memory of hyperinflation, the researchers argue.
Higher inflation expectations may also influence more than basic household decisions about consumption. “Households residing in areas with higher historical inflation are more likely to prioritize the fight against inflation as a political goal over maintaining peace and order,” the researchers find, “increasing citizen influence on government decisions, and protecting the right to free speech.”
Recognizing the enduring nature of inflation expectations may be critical for policy makers, the researchers suggest, including central banks charged with keeping inflation under control, and politicians who set fiscal spending and revenue goals.
Fabio Braggion, Felix von Meyerinck, Nic Schaub, and Michael Weber, “The Long-Term Effects of Inflation on Inflation Expectations,” Working paper, January 2024.
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