Generational Divide in US Inflation Expectations... Due to Experience Differences from the 1970s High Inflation Era

[Asia Economy Reporter Byunghee Park] Amid rapidly rising inflation in the United States, expectations for future inflation rates vary significantly across generations. This difference is interpreted as stemming from the varying experiences of the high inflation era of the 1970s.

According to a survey by the New York Federal Reserve on expected inflation rates one year ahead, the median expected inflation rate among those aged 60 and over was 4.821%, approaching 5%, while for those under 40, it was only 3.194%. This means there is nearly a 2 percentage point gap in inflation expectations between the elderly and the younger generation. The middle group, aged 40 to 60, had an expected inflation rate of 4.0%.

In the 1970s, the U.S. inflation rate soared well into double digits. Paul Volcker, then Fed Chairman and known as an inflation fighter, raised the U.S. benchmark interest rate to nearly 20% to curb inflation.

However, as U.S. economic growth slowed afterward, inflation rates gradually declined. Since the 2008 global financial crisis, achieving the Fed’s monetary policy target of 2% inflation has become difficult. Although inflation in the U.S. has surged sharply due to COVID-19, one reason the Fed still views recent inflation as temporary is because of the prolonged period of low inflation.

In short, generations that experienced the high inflation era of the 1970s tend to have higher inflation expectations compared to younger generations.

Larry Fink, CEO of BlackRock, the world’s largest asset management firm, also mentioned inflation experience during an online event hosted by Deutsche Bank, Germany’s largest bank, on the 2nd. Fink pointed out that inflation had been declining for over 30 years and said that since most investors today have no experience with inflation, a sudden surge in prices could be a significant shock.