Viewed from this perspective, the institutional conditions for anchoring inflation expectations are arguably better overall today than they were back then. This should not lead us into complacency, though. Inflation rates will not return to the central bank’s inflation target of their own accord. Monetary policy needs to respond decisively in order to preserve the credibility of the inflation target.
If this doesn’t (Tonne) happen, firms, households and wage bargainers may well lose faith in the medium-term inflation target. One warning sign here is the fact that longer-term inflation expectations are now showing a stronger response to surprises in the inflation rate. There are other signs, too, that the risk of inflation expectations becoming unanchored has increased.