Will central bankers tame inflation in 2023? Expect most countries to get it under control—though not without serious pain WorldAhead
saying in the world of monetary policy: only hawks go to central-banker heaven. Among the men and women charged with managing their economies’ money, the fortitude to rein in an economy which is growing too strongly—to take away the punch bowl just as the party gets going, as a Federal Reserve chairman once put it—is among the most admired of traits.
The sharp and persistent rise in inflation which began in 2021 has, however, given today’s central bankers their moment to shine. In 2023 most countries will get inflation under control, though not without serious pain. The problem grew to distressing dimensions in 2022, after Russia’s invasion of Ukraine sent prices of food and energy skyward. Many economies saw inflation rise to levels unseen for decades. The rate of consumer-price growth peaked at 9% in America and reached a record 10.
As inflation rose, an intense economic debate broke out concerning how hard central banks should hit the economic brakes—by raising interest rates, for instance—in order to check price growth. Some more doveish figures counselled a light touch, arguing that because so much of observed inflation was associated with supply problems, it should in large part resolve itself.
By early 2022, the latter view had begun to win over many central bankers. The Federal Reserve, which in 2021 had waited patiently for prices to ease on their own, raised its main policy rate by 0.25 percentage points in March and 0.5 points in May, and a whopping 0.75 in June, September, October and November. Yet to begin with, central bankers held out hope that inflation might be brought to heel without a growth-crushing recession.
By August, Mr Powell’s tune had changed. Higher interest rates would eventually bring down inflation, he said, but “they will also bring some pain”. Other central bankers concurred. “For the first time in four decades”, noted Isabel Schnabel, a member of the board of the European Central Bank, “central banks need to prove how determined they are to protect price stability.
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