High inflation flashbacks
-
We have looked at past episodes of high inflation in the US, UK, Germany and the Nordics during the past 100 years to see how fast inflation normalise.
-
We find that it takes two and a half years and possibly more than four years before inflation returns to 2%, which in the current setting would mean that inflation might not normalise before earliest during the summer or autumn 2024.
-
The market and professional forecasters look for inflation to return close to 2% in about 2Y, i.e. a rapid normalisation from a historical perspective.
-
Central banks now target price stability, which means inflation could revert faster than in earlier high inflation episodes. However, market participants risk underestimating stickiness in high inflation regimes.
The surge in inflation in the US and Europe puts macroeconomic models to the test. When can we expect inflation to return to 2 %? We attempt to answer this question by looking back at history. The world economy has endured periods of high inflation in the past, and we use this experience as a guide to what to expect.
We use data for inflation in the US, UK, Germany, Denmark, Sweden, Norway and Finland going as far back as 1914. We count the number of months it takes for annual inflation to return below 3% for three consecutive months after it has risen above 7% and use this as a measure of the time it takes for inflation to normalise again – see box 1 for more details on methodology.
In the rest of the paper, we first go through our results. Then we compare our results with other forecasts and expectations and finally, we discuss how the current situation differs from the past and what implications our analysis has for policy makers. Our results are not that encouraging.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
