A danger of high inflation is that it becomes a self-fulfilling prophecy, making inflation stubbornly “sticky.” When people expect prices to rise even further, they will understandably ask for higher pay. (And during labor shortages, they often get it.) To make up for any difference in their profit margins, employers in turn charge higher prices for the goods and services they provide, which in turn leads to demand for higher pay, feeding the wage-price spiral.
That said, although measures of inflation expectations for the next 12 months have risen, most consumers, business leaders, and the financial markets don’t expect such inflation rates to persist much longer after that—a sharp contrast from the mindset of the 1970s, when most were resigned to double-digit inflation.
Another difference from the ‘70s: The Fed is aware that its recent aggressive rate hikes are still not restrictive enough. Although the Fed was late in raising rates last year, it is now biased for action and intent on driving inflation down even if a recession occurs. When a central bank does that, it usually gets what it wants.