Despite a recent decline in inflation, central banks are being urged to stay alert to potential price surges driven by consumer fears. The Bank for International Settlements (BIS), the global institution that advises central banks, has raised concerns that households in both advanced and emerging economies continue to expect significantly higher inflation than current levels suggest. A recent BIS analysis covering 29 economies found that the public anticipates inflation of around 8% over the coming year, well above the current global average of 2.4%.
This divergence between actual inflation and public expectations risks destabilizing central banks’ efforts to control prices. When people expect prices to rise, they may act preemptively, demanding higher wages or raising prices themselves, thereby fueling further inflation. Hyun Song Shin, head of the BIS’s Monetary and Economic Department, emphasized that households’ experiences during the post-pandemic price spikes have left lasting psychological impacts, making them particularly sensitive to any signs of rising costs.
Economic Uncertainty Adds to Policy Challenges
Although inflation is generally declining, forecasted by the IMF to fall to 2.2% in advanced economies and 4.6% in emerging markets next year, central banks remain uneasy. The scars left by the pandemic, compounded by the effects of geopolitical tensions and commodity price shocks, have created a volatile backdrop for monetary policy. The aftermath of the COVID-19 pandemic, along with the war in Ukraine and rising energy costs, has all contributed to a shift in inflation dynamics.
New trade tensions, particularly in the U.S. under the legacy of former President Donald Trump’s tariff hikes, are creating fresh concerns. The Federal Reserve has kept interest rates steady this year, partly out of caution over how new or increased tariffs could rekindle inflation. Fed Chair Jay Powell acknowledged that although past tariffs were considered temporary disruptions, the current global environment calls for a more cautious approach. Inflation in the U.S. is not yet back to the Fed’s 2% target, and additional price pressures from trade wars or supply disruptions could complicate its trajectory.
Global Banks Brace for a More Volatile Future
According to the BIS’s annual report, several structural forces are poised to keep inflation unpredictable. These include demographic shifts such as aging populations, climate-related challenges, geopolitical instability, and reduced flexibility in global supply chains. BIS General Manager Agustín Carstens warned that such factors could result in households being less willing to accept further declines in real income, making inflation management even more complex for policymakers.
Recent data from the University of Michigan shows that public inflation expectations soared following Trump’s tariff announcements in April, reaching levels not seen since the early 1990s. Although those expectations have since eased as U.S.-China tensions cooled, they remain well above the Federal Reserve’s ideal. Meanwhile, the Bank of England has also flagged concerns about “elevated” inflation expectations from both households and businesses, particularly in light of potential energy price shocks tied to unrest in the Middle East.
With inflation expectations proving difficult to control, global central banks face an increasingly delicate balancing act, keeping inflation in check while avoiding the kind of panic that could reignite it.
