Without appealing to esoteric economic theories of sunspots, these expectations don’t seem sustainable in the current environment. Higher inflation expectations would presumably get priced into higher bond-market yields and higher financing rates generally. Until inflation actually rises – remember, this story has expectations rising first – ex post real interest rates would be higher and that would presumably result in a higher debt burden for borrowers. This would reduce aggregate demand. Lower demand and lower growth would further reduce cost pressures, strongly suggesting that higher inflation expectations would not be ratified by inflation experience, and thus, would not be sustained. Frankly, this story just seems very unlikely. Fourth, another more direct measure of potentially rising costs and hence inflation might be stronger wage growth. The economic story here is a bit involved. Most economic research indicates that rising wages are not a leading indicator of rising inflation, so wages are rarely an early warning signal for future inflation. However, higher inflation would lead to higher nominal wage growth. And the double-digit inflation experience of the 1970s suggests that inappropriately accommodative monetary policy can amplify rising cost pressures, creating a wage–price spiral. Clearly, unsustainably strong nominal wage increases would very likely be symptomatic of rising inflation pressures. In terms of the current situation, there is good news and bad news. The good news is that currently, wage increases are low and not symptomatic of high inflation. The bad news is that, currently, low wage increases are symptomatic of weak income growth and low aggregate demand.

Surely, they say, enormous increases in the monetary base are likely to be accompanied by substantial price level increases. The problem with this story is that the banks have not been lending these reserves nearly enough to generate big increases in broad monetary aggregates. And even if they did, as an indicator of inflation, the monetary aggregates lost their predictive content many decades ago. The evidence, again, is that inflation remains low. But what if? What if lending picks up? Well, that would be really terrific. Dramatically higher bank lending would surely be associated with higher loan demand and a generally stronger economy. Strong growth and diminishing resource slack would be part of this story, and a rising rate environment would be a natural force diminishing the rising inflation pressures. In the meantime, monitoring the entire state of the economy along with  6  Evans and Fisher (2011). BIS central bankers’ speeches  5  inflation seems like a sensible and appropriate safeguard against this currently low probability scenario. Third, another potential source of inflationary pressures would be rising inflation expectations. Here, I mean a breakout of inflation expectations separate from any fundamentals that might accompany the previously discussed cases of rising commodity prices and stronger bank lending. One could think of this as the spontaneous combustion theory of inflation. The story goes like this: Households and businesses simply wake up one day and expect higher inflation is coming without any further improvement in economic fundamentals.