Large price increases leave their mark not only today: new insights from Tilburg economist Fabio Braggion and coauthors show that experiences with inflation can influence how people view inflation decades, even up to a century later. Researchers find that historical inflation not only shapes expectations of future price increases, but also affects financial decisions and the effectiveness of policies affecting inflation.
The researchers use Germany as a case study, focusing on the hyperinflation of the early 1920s. Households that live in areas with higher inflation at the time still expect higher inflation, nearly a century later. According to economist Fabio Braggion, the effect is deeply embedded in both family life and the collective memory of communities, and is further reinforced by political speeches and media coverage.
Inheritance and collective memory
‘We observe two ways in which inflation affects generations’, says Braggion. ‘First, through vertical transmission: parents pass on their experiences to their children. Households with a migration background, whose ancestors did not experience the hyperinflation, appear less influenced in their expectations. Second, through horizontal transmission: the collective memory of communities keeps the inflation narrative alive. Politicians from areas with higher historical inflation talk about it more frequently, especially when prices rise, and local newspapers devote more attention to it.’
Expectations and financial choices
Historical inflation also affects how people respond today to current price increases and policy measures, such as temporary VAT changes. Households from areas with high historical inflation adjust their expectations more strongly in response to new inflationary signals and invest less in bonds, likely due to lower perceived real returns.
Effects in Poland
The effects are not unique to Germany. In areas of present-day Poland that belonged to Germany between 1920 and 1924, households show similar patterns: higher local historical inflation correlates with higher inflation expectations, particularly in regions with fewer population movements during and after World War II.
Policy implications
These findings have important implications for central banks, the researchers note. When expectations are shaped by inflation experiences from the distant past, they adjust slowly, making stabilization measures less effective and increasing the costs of disinflation. The study highlights the importance of anchoring inflation expectations early and may help explain the historically conservative approach held by German institutions towards monetary policy.
Publication
The Long-term Effects of Inflation on Inflation Expectations by Fabio Braggion, Felix von Meyerinck, Nic Schaub, and Michael Weber.
Germany, 1923: During hyperinflation, banknotes had lost so much value that they were used as wallpaper, being much cheaper than actual wallpaper. Source: Creative Common