Moreover, inflation expectations in, say, 1970 were certainly not for the inflation that subsequently occurred. Policymakers tended to blame inflation on temporary factors then, too, just as we have seen more recently.
Economies are, it is true, more flexible now than in the 1970s. But the upsurge in protectionism may lead to a reversal in this respect. Energy intensity has certainly fallen since then, too. But energy prices are still important. Finally, fiscal policy is expected to be less expansionary this time, though it was very much so in 2020 and 2021.
In all, the assumption that things will be very different this time has plausibility but is far from certain.
POLICYMAKERS CANNOT LET INFLATION GET OUT OF CONTROL
Above all, whether it proves true depends on what policymakers do. They need to avoid the mistake of allowing inflation to get out of control, as they did in the 1970s. They should still have time to do this. But acting decisively creates dangers too, most obviously of an unnecessarily sharp slowdown, with the economic costs that would follow.
Against this, it is possible that demographic shifts, slowing technological change, deglobalisation, exhaustion of important past opportunities for growth and rising populism will weaken disinflationary forces in the long term. That would make achieving and sustaining low inflation even harder.
An obvious danger arises in the one respect in which the world economy looks more fragile than 40 years ago: The size of the debt stock, especially the stock denominated in foreign currencies. Crucially, that is not only true of emerging and developing countries. The euro, too, is in essence a foreign currency for a crisis-hit eurozone member.
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