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In early 2022, with consumer price inflation already high, a spike in the price of gasoline increased public concerns that the U.S. economy could be in for a repeat of the inflationary spiral that gripped the nation in the 1970s and 1980s. During this period, energy price increases created an environment where rising inflation and rising inflation expectations reinforced one another until a deep economic contraction broke the feedback loop.

Nida Çakır Melek, Francis M. Dillon, and A. Lee Smith assess the risk of a similar spiral in the current environment by exploring whether high inflation makes consumers’ inflation expectations more responsive to salient price increases—namely, higher gasoline prices. They find that in response to an increase in the national price of gasoline, individuals with higher initial inflation expectations revise up their one-year-ahead inflation forecasts by almost twice as much as those with lower initial inflation expectations. With inflation currently high and consumers’ inflation expectations elevated, their results suggest that changes in salient prices could indeed have an amplified effect on inflation expectations.

Publication information: Vol. 107, no. 4
DOI: 10.18651/ER/v107n4CakirMelekDillonSmith

Authors

Nida Çakır Melek

Senior Economist

Nida Çakır Melek is a senior economist in the Economic Research Department of the Federal Reserve Bank of Kansas City. She joined the Bank in August 2013 after receiving her Ph.D…

A. Lee Smith

Vice President and Economist

Andrew Lee Smith is a Vice President and Economist in the Economic Research Department of the Federal Reserve Bank of Kansas City. In this role, Lee has oversight of macroeconomi…