What Causes Inflation to Become Persistent (Not Temporary)?

Inflation has gone up a lot lately, and it's kind of scary how people are not sure if it will stop anytime soon. Usually, prices go up for a bit because of some problem, like supply issues, but then they calm down. The worry is when it just keeps going, you know, persistent inflation that sticks around.

Things start with shocks in the economy. By shocks, we just mean something unexpected that hits the economy and messes things up, like supply chain breakdowns, energy price spikes, or suddenly everyone wanting the same thing at once. For example, in cars, they could not get microchips, so factories slowed down, but people still wanted to buy, so prices shot up. Same with energy costs or messed-up supply chains. If the shock fixes itself fast, prices drop back, but sometimes it drags on.

What makes it worse is this momentum effect. Once prices are already high, businesses start adjusting their behavior — they raise prices not just because costs went up, but because they expect them to keep going up. Even if supply problems get better, prices don’t fully come back down. At the same time, workers see their purchasing power falling, so they push for higher wages. But higher wages increase costs for businesses, which then raise prices again.

So you get this loop: prices go up → wages go up → costs go up → prices go up again. And it just keeps feeding itself.

This is often called a wage-price spiral, and it’s a big reason why inflation becomes persistent instead of temporary. A classic example is the U.S. in the late 1970s and early 1980s, when inflation stayed high for years. It only really came down after the Federal Reserve, under Paul Volcker, aggressively raised interest rates, even at the cost of slowing the economy.

At a basic level, inflation comes from the relationship between money, demand, and real economic activity. Economists often describe this using Irving Fisher’s idea: nominal interest rates are basically the sum of the real interest rate and expected inflation. Expectations play a big part here. If everyone thinks prices will keep rising, they act like it, and then it really does. During the Great Moderation (around 1985–2008), people generally trusted that inflation would stay low, so shocks didn’t last long. But in the 1970s, expectations moved together with inflation: once prices started rising, people assumed it would continue, and that belief ended up making the problem even worse.

It’s not just the U.S. You can see the same pattern globally. Countries like Turkey and Argentina have struggled with inflation that sticks around, while others like China and Japan have managed to keep it relatively low. Seems like it depends on how much people trust the policies over time, not just one fix.

When that trust is weak, everything we talked about starts to reinforce itself: shocks last longer, businesses keep pushing prices up, and expectations drift higher. That’s how inflation becomes persistent. At that point, central banks have to step in hard. But the longer inflation is allowed to build, the more painful it becomes to fix, often requiring aggressive rate hikes, slower growth, and even recessions to bring things back under control.