The Soft Tyranny of Inflation Expectations


  • This article builds on my lecture of the same title (Posen 2011). I have benefitted from comments from Chris Alsopp, Alex Brazier, Chris Carroll, Neal Hatch, Tomas Hellebrandt, David Hendry, Jake Horwood, Neil Meads, Steve Nickell, Tom Smith, Tim Taylor, Marilyne Tolle, Simon Wren-Lewis and members of the Monetary Policy Committee. Hellebrandt and Tolle provided excellent research assistance. The views expressed here and any remaining errors of fact or interpretation are solely my own, and not those of the MPC, the Bank or PIIE.

Adam Posen

Member, Monetary Policy Committee Bank of England

Threadneedle Street

EC2R 8AH London UK


The degree of anchoring of inflation expectations is a key determinant of outcomes in all modern macroeconomic models, inspired by the experience of the 1970s. For monetary policy-making today, however, the sensitivity and relevance of measured inflation expectations is more questionable. The British economy, beset by a series of significant shocks in 2008–11, while operating an inflation targeting regime, provides a case with which to explore these issues. Five conclusions emerge given current monetary and economic structures: reliable forecasts for domestically generated inflation can be made taking inflation expectations as anchored; movements in measured short-term inflation expectations are uninformative for forecasts; financial markets can distinguish between increased economic uncertainty and uncertainty about monetary credibility; real wages do not automatically respond to rises in household inflation expectations; monetary policy should be set in accord with the best medium-term forecast for inflation without adjustment for inflation expectations in and of themselves.