Suppose we forget about timing for a moment. An increase of 0.6 per cent in the expected ten year inflation rate implies a price level 6 per cent higher than with target inflation. That's pretty much what happened in the post-lockdown period. If people expected the inflation to be transitory, then expected 10 year inflation would fall ba…
Suppose we forget about timing for a moment. An increase of 0.6 per cent in the expected ten year inflation rate implies a price level 6 per cent higher than with target inflation. That's pretty much what happened in the post-lockdown period. If people expected the inflation to be transitory, then expected 10 year inflation would fall back to the pre-Covid level once that was past.
I don't think this story is consistent with full forward-looking rationality, but it seems to work.
Suppose we forget about timing for a moment. An increase of 0.6 per cent in the expected ten year inflation rate implies a price level 6 per cent higher than with target inflation. That's pretty much what happened in the post-lockdown period. If people expected the inflation to be transitory, then expected 10 year inflation would fall back to the pre-Covid level once that was past.
I don't think this story is consistent with full forward-looking rationality, but it seems to work.