Inflation inertia is attributable to
A) inflation shocks and shocks to potential output.
B) output gaps and inflation shocks.
C) disinflation and inflation shocks.
D) output gaps and disinflation.
E) inflation expectations and long-term wage and price contracts.

Question

Quizplus · Accepted Answer

Inflation inertia is the tendency of inflation to persist at its current level due to a variety of factors, such as inflation expectations and long-term wage and price contracts. These factors create a resistance to changes in the rate of inflation, even in the face of changes in economic conditions. Thus, option E, which mentions inflation expectations and long-term wage and price contracts, is the best choice. The other options do not specifically address this aspect of inflation inertia.

Inflation Inertia Is Attributable to