Chronic inflation and the costs of not addressing an upsurge in time

The study of chronic inflation has declined over the years, but the recent surge in global inflation has made it crucial to revisit this phenomenon to prevent it from becoming entrenched. In this paper, we identify more than 300 significant inflation outbreaks worldwide and explore why some become chronic while others do not. Our findings reveal that large inflation surges negatively impact GDP in the short term, regardless of whether they become chronic. This affects particularly middle-income economies, Latin American and Caribbean countries, and Middle Eastern and North African nations. Although these shocks are often exogenous, their consolidation into chronic inflation largely depends on policy responses. When governments effectively address upsurges with monetary, exchange rate, and fiscal policies, they can resolve the outbreaks; however, inaction leads to the entrenchment of chronic inflation. In such cases, the likelihood of reaching higher inflation levels increases, and the resulting output losses are significantly more severe, especially in middle-income economies and Latin American and Caribbean countries.