LONDON – The recent surge in inflation may have left Gen Z consumers permanently scarred and afraid that prices will rise, new research shows, in findings that could complicate the job of central bankers for years to come.

Younger generations have historically had much lower inflation expectations than older age groups that remember the bouts of surging prices in the 1970s and 1980s.

However, analysis based on British data found that the inflation expectations of those aged 16 to 24 in Gen Z have risen more than any other age group since the Covid-19 pandemic and war in Ukraine sent prices rocketing.

Evidence from Europe also indicates that the scarring caused to generations by high inflation can be inherited down the generations, while other research focused on the Federal Reserve in the United States suggests that an experience effect from inflation even affects central bankers.

The research is important because it touches on how inflation expectations are shaped and how a significant period of higher prices can shift the way people think.

It points to more pressure from workers to raise pay, and interest rates staying elevated for longer.

Having experienced double-digit price growth for the first time, young people in Britain are more likely to expect high inflation to continue, Bloomberg analysis of Bank of England (BOE) data found. This spells difficulty for policymakers who are trying to meet a 2 per cent inflation target by discouraging workers from bidding up wages.

“Inflation expectations have gone up a lot among young people,” Oxford Economics senior adviser Michael Saunders, a former BOE rate-setter, said of the British situation.

“It’s reasonable to expect there will be some scarring on inflation expectations,” he said. “The young who thought that high inflation would mean 2 per cent or 3 per cent now might have a much wider range of expectations of where inflation could be.”

Inflation expectations help determine pay demands and, in turn, price setting by companies. Controlling those expectations is a key task for policymakers, who want to keep them anchored around 2 per cent.

Economists call this an “experience effect”, where people living through periods of volatile and high price growth in the 1970s and 1980s have those memories seared more deeply in their thinking than those who just know about it from history books.

The experience effect can have a powerful impact, according to research by economics professor Ulrike Malmendier at the University of California in Berkeley.

Dramatic economic experiences, such as high inflation and unemployment spikes, “leave a lasting impact on how you form beliefs for years to come”, she said.

Countries that suffered the worst bouts of inflation, such as Britain and parts of the euro zone, are most at risk of a big shift in consumer behaviour.

“This experience effect, this effect that will be ingrained in your thinking for years and decades to come, is much more likely to kick in,” said Dr Malmendier.

She said this can lead to some positive impacts, such as consumers saving more.

The experience effect is so powerful that research suggests it could even influence central bankers and be passed down the generations.

Dr Malmendier found that the inflation experiences of Fed rate-setters in the US could determine their hawkish or dovish leanings and how they would vote. It suggests that future central bankers could be shaped by their experience of the post-pandemic surge.

Meanwhile, a study by Dr Fabio Braggion, professor of finance and financial history at Tilburg University, found that the scarring related to inflation can even be passed on.

Households in European countries that suffered hyperinflation before 1930 have inflation expectations today that are 1.4 percentage points higher than countries that avoided it, he said. In Germany – which was hit by hyperinflation during the Weimar Republic – households in areas with higher local inflation during this period have higher inflation expectations today.

Dr Braggion said that this suggests that there could be “something cultural” about inflation expectations.

“We suggest two possible channels,” he said. “One is an intergenerational channel, so you may talk about it in the family. Second, we examined the role of institutions. Even today, we see that the local press tends to report more about inflation in areas where inflation was higher in the 1920s.”

The inflation expectations of younger generations catching up with those of older people could make the task of central bankers that little bit harder.

“A world in which supply shocks are more frequently adverse would probably cause inflation expectations to settle above target-consistent rates,” Oxford Economics’ Mr Saunders said, adding that this would “make life much harder for central bankers looking to get inflation back to target”. BLOOMBERG