After the pandemic, inflation surged globally, prompting urgent responses from central banks. The economic fallout and rapid rebound forced many to weigh the costs of tightening policy too soon against the risks of affecting the economic recovery that many economies were experiencing. While responses varied, many central banks in Latin America and the Caribbean acted swiftly, focusing on the cost of inflation and its potential to become embedded in expectations.
Our recent research suggests this early action was well justified. We find that consumers rely heavily on their personal experience with inflation when forming expectations and that long-lasting recollections help explain why inflation, once it takes hold, is hard to dislodge.
We also find that acting quickly to contain inflation not only prevents it from rising to undesirable levels, but also reduces its feedback effect on expectations, thus avoiding longer period of contractionary measures.
Latin America’s Inflation Memories
Few regions illustrate the power of inflationary memory better than Latin America. From the hyperinflation episodes of the 1980s and 1990s in Argentina, Brazil, and Peru, to more recent cases in Venezuela and Argentina, many households in the region have lived through long periods of price instability.
These experiences are not easily forgotten. Our model–and supporting evidence from U.S. and European surveys–shows that people anchor their inflation expectations to personal history. In Latin America, where inflation has often returned after brief periods of stability, consumers may be especially skeptical that low inflation will last. This skepticism shapes consumption, savings, wage bargaining, and even trust in monetary authorities.
To model these dynamics, we use an “experience-based Kalman filter,” which combines current inflation signals with a person’s history. This framework replicates survey data well and is flexible enough to incorporate into macroeconomic models, allowing us to explore how memory-based expectations affect other economic outcomes and consider the best policy options.
Inflation Expectations are Personal
We find, among other things, that inflation expectations are shaped by one’s lifetime experiences, ultimately reflecting one’s age. Generations that lived through past inflation surges, tend to expect higher inflation, even when current rates are low. By contrast, new generations, with little history to draw on, are particularly sensitive to initial conditions. If their first experience as consumers is in a high-inflation environment, its impact can define their expectations for years. As a result, inflation shocks in the future could last longer, affecting people’s economic decisions and making inflation more persistent.
In Latin America, where central banks have worked hard to regain credibility, inflation episodes such as those experienced in the post-pandemic period can be very harmful. The post-2021 inflation episode, our research suggests, may leave a lasting mark, with a new generation experiencing high inflation for the first time. Delaying policy tightening in this context not only raises current inflation expectations. It creates a historical reference point that the new generation may not forget, making future disinflation efforts harder.
Avoid Inflationary Episodes
Today, some central banks in the region continue to battle high inflation and may face a more difficult path than those in other countries, not for lack of action, but because consumers have built inflation into their expectations. The message for all countries is clear: avoiding inflationary episodes is the best way to keep expectations anchored and maintain macroeconomic stability.
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