Gen Z may be left permanently psychologically scarred by high inflation, research says—and it could slow down efforts to bring spiraling costs under control

Gen Z’s early careers have been stifled by a number of challenges, from a once-in-a-generation pandemic and a war on European soil, to spiraling living costs and recession fears that have led to widespread layoffs.

But according to new research, the economic backdrop in which young people are entering the workforce could have a much deeper impact on Gen Z than a squeeze on their lifestyles.

In a new analysis of data from the Bank of England, Bloomberg found that inflation expectations were surging among the U.K.’s young people—a cohort that has historically had lower inflation expectations than their older counterparts who lived through the elevated costs of the 1970s and ‘80s.

That could make monetary policymakers’ jobs trickier, as it could shape pay expectations and spending habits that ultimately push prices higher.

A recent Bank of England survey showed that two-thirds of Britons expect prices to rise over the next year. More than half told the central bank they did not have confidence that inflation would fall to somewhere near the 2% target within the next two or three years.

However, Bloomberg’s more detailed analysis of the data suggested young people in particular were bracing themselves for inflation to persist. The publication’s findings showed that since the pandemic and Russia’s invasion of Ukraine, inflation expectations among Brits aged 16 to 24 have risen more quickly than they have among any other age group.

The change was chalked up to Gen Z having inflation ingrained into their psyches, having lived through a cost-of-living crisis during their formative years—something Bloomberg noted was known as the “experience effect.”

The news outlet’s analysis of the data showed that 16- to 24-year-olds were the second most likely age group to have seen a rise in inflation expectations, after those aged 55 to 64. The people making up that cohort—young Baby Boomers and older Gen Xers—grew up during the inflation crisis of the 1970s, when Britons saw inflation hit 25%, and was entering the workforce in the 1980s, when the country was suffering another cost-of-living crisis.  

According to Bloomberg, millennials and younger members of Gen X—who, in the U.K., have seen inflation stay close to the Bank of England’s 2% target for much of their working lives—had lower inflation expectations than Gen Zers.

‘Psychological scars’

Dr. Dayo Abinusawa, founder of London’s Awa Business School and a former lecturer at Cambridge University’s Judge Business School, told Fortune on Monday that the ongoing battle with inflation would have had a serious impact on the mindset of Gen Z workers—those aged 26 and under.

“Gen Z will be left with psychological scars from persistent inflation due to increased uncertainty and anxiety,” he cautioned. “Young people are typically affected by inflation, as they are most likely to work part time or in low paid jobs.”

Abinusawa warned that the impact the cost-of-living crisis was having on young people’s sense of hope would have a ripple effect that extended far beyond Gen Z.  

“How can young people build careers or wealth if they don’t have jobs and prices of goods and services continue to increase?” he said. “A society where the young have little to no hope for the future is not a sustainable one. Not only will Gen Z be left with psychological scars, society at large will also feel the impact of these scars.”

‘Inflation death cycle’

Paul Allison, an analyst for investment platform Finimize, explained that if rising demand for goods and services is coupled with higher wages or stronger economic growth, the idea that inflation will stick around “permeates into peoples’ psyches.”

Despite grappling with the highest inflation rate of the world’s advanced economies, as well as a volatile currency and political turmoil over the past few years, the U.K. economy has proven more resilient than expected in recent months, with wages rising at a record rate and GDP growing faster than forecast.

“When everyone expects prices to rise, they rush out to buy now at cheaper prices, pushing up demand and prices further,” he told Fortune. “This starts an inflation death spiral that’s very hard to break.”

However, he argued that the inflation anxiety being seen among young consumers was more about the ramifications of higher interest rates than which generation had the most experience with spiraling costs.

“For younger people, higher interest rates render buying a home outright unaffordable without years and years of frugality and saving,” he said. “Older generations [also] tend to hold more assets than younger ones.”

Hetal Mehta, head of economic research at St. James’s Place, agreed that young people were more likely to be hit hard by inflation as they typically spent a higher proportion of their incomes on essentials.

Rising and persistent inflation expectations would eventually begin to feed into two key channels, she predicted.

“One is the higher wage demands as people try to maintain their purchasing power. The other potential is that it can help bring forward spending,” she said. “Many firms will try to pass on at least some of the higher wage bill to their customers—this can clearly lead to a vicious circle.”

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