The words “inflationary expectations” must by now be familiar to every newspaper reader who even glances at economic pronouncements. Yet a few years ago they were unknown outside specialist circles. Central bankers certainly pontificated on them, but it was not this part of their pronouncements that made the headlines. Yet now the importance of keeping them down has almost become a cliché.

They appeared in academic debate as early as the 1970s and 1980s in relation to the so-called monetarist controversy. The key contention of the monetarists was not about the need for money supply targets, as technocrats assumed, but that monetary policy rather than direct intervention in wage or price setting was the right method of tackling inflation. Their opponents believed that this could only work by creating a slump in which millions would lose their jobs. The more thoughtful monetarists did not deny that there was a transitional cost in squeezing inflation out of the system. But the severity of that cost would depend on how credible the policy was. If the main economic actors believed that policymakers would stick to their guns, they would base their actions on the assumption of modest inflation and would frame their behaviour accordingly and settle for moderate increases in pay and prices. If on the other hand they expected the policy to be eventually abandoned, any monetary squeeze would indeed have its main effect in reduced output and employment.