Shocks, Crises, and False Alarms

CHAPTER 12 Breaking the Inflation Regime Is (Very) Hard

Low and stable inflation is the cornerstone regime of the good-macro world. We’ve already seen how it enables stimulus ability and cycle longevity. In later chapters we’ll see its role in debt sustainability and modest interest rates (which contribute to high valuations).

We have called this anchored inflation regime the Volcker inheritance, a reference both to Paul Volcker, who reanchored broken inflation expectations in the early 1980s, and to the enormous structural benefit this has conferred on generations since. As shown in figure 12.1, the low inflation regime also powerfully anchored interest rates. Let this one regime break and a cascade of structural downgrades will follow. ...