Adriana Kugler on the Puzzle of Uncertainty and Inflation

Ask ten economists whether uncertainty pushes inflation up or down, and you may get several confident, contradictory answers. The disagreement itself turns out to be the more interesting finding.

Ask ten economists whether rising uncertainty pushes inflation higher or lower, and you will likely get several different, well-supported answers. That is the strange state of one of the more pressing questions in macroeconomics today. I have returned to this question repeatedly in my academic work and in venues like my 2025 Whittington Lecture at Georgetown's McCourt School, and the honest answer is that the literature on what drives inflation does not converge on one story.

The spread of findings is striking. Some papers find uncertainty pushes inflation down. Others find it pushes inflation up. A few find no measurable effect at all. One rigorous study traces consumer uncertainty through what economists call a real-options channel: uncertain consumers pull back, firms hold off on hiring, and the result is higher unemployment alongside softer prices. But other research complicates that story. One paper finds negative effects only during financial crises and positive effects the rest of the time. Another finds essentially nothing through the mid-1990s in the United States, followed by positive effects afterward.

“You have effects on inflation all over the map. They're positive in some studies, they're negative in others.”

It would be tempting to conclude the relationship is simply unknowable. I do not think that is right, and the reason says something important about how empirical economics gets done. These studies disagree largely because none of them separate uncertainty into its different sources. They treat uncertainty as one thing, when in reality it comes from many different places, each with its own economic footprint. That distinction is the core of much of my recent research: if different sources of uncertainty move inflation in different directions, then any study that lumps them together will produce results that depend entirely on which source happens to dominate in the data being examined. I go into this in more depth in my speaking work and public lectures, and a fuller account of the research agenda is available on my Georgetown faculty page.

One idea worth explaining plainly is the real-options channel itself. When the future is genuinely uncertain, there is value simply in waiting. A firm weighing whether to hire or invest can treat that choice the way an investor treats a financial option, it does not have to commit today, so it waits. Vacancies go unfilled, projects get shelved. When enough firms make that calculation at once, hiring and investment pull back economy-wide, cooling activity and easing price pressure. But this is only one channel. Others push the opposite way, for instance when uncertainty raises costs or disrupts supply. Which channel wins out is exactly what decides whether the net effect on inflation is positive or negative.

For anyone setting monetary policy, this is not an abstract debate. Assume uncertainty always raises inflation and you respond one way. Assume it always lowers inflation and you respond in the opposite way. If the honest answer depends entirely on which kind of uncertainty is in play, both reflexive responses are a mistake. Diagnosis has to come before prescription, and that diagnosis needs to identify precisely which source is driving the current episode.

This is the argument I carried from my academic research directly into my work on the Federal Open Market Committee: disaggregate uncertainty into its distinct sources before drawing policy conclusions from it. A record of that period is available through the Federal Reserve History archive. The next step is to take that disaggregation seriously and examine how each individual source actually behaves.

Adriana Kugler, Ph.D., Labor Economist & Georgetown Professor