High inflation can impose costs beyond just its financial burden

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Subscribe to enjoy similar stories. The recent US election that carried Donald Trump back to the White House with a strong mandate underlines a point that was perhaps forgotten by political leaders in many rich countries over a long era of stable prices: Inflation matters. No election result is monocausal.

It is usually a combination of economic, political and social factors, but the rising cost of living seems to have been an important ingredient in the US results. The Trump victory was bookended by the end of Conservative Party rule in the UK and the collapse of the ruling political alliance in Germany. There are a few lessons for economists as well.

The most important one is that voters think about price levels rather than just the rate at which they are changing. The price of a cup of coffee or a bag of groceries has materially changed over the past four years in many rich countries. Even tourists feel it.

So inflation, or the rate at which prices are going up, may have been brought to heel; but the inflation spike that came before has left the price level way above what voters are comfortable with. The lingering effect of past inflation on current voting behaviour—and perhaps economic behaviour such as wage demands or profit calculations— also means that choices are made in the shadow of the past rather than being solely based on what lies in the future. In more technical language, inflation expectations can be adaptive rather than rational, especially when policy credibility has been rattled.

Macro policy thus needs to be more conservative than usual if it is being crafted in the wake of a burst of unexpectedly high inflation. Related to all this is the idea of rational inattention to inflation. Surveys show that