Foreword: Fraying at the Edges

The current escalation in inflation poses a deep problem for central bankers who have become accustomed to plaudits rather than brickbats over the past quarter of a century. Indeed, such has been their dominance that they have in many parts of the world been the only game in town when it comes to domestic reform and political stability. The re-emergence of inflation also poses a critical set of questions for two systemically important central banks, the Federal Reserve and the European Central Bank, who account for monetary conditions for over 60 per cent of global GDP. Their policies in response to the global financial crisis provided enormous vats of liquidity and further interventions helped limit the impact of Covid-lockdowns on economic activity. At the same time policy rates hovered around zero. The stimuli thus provided was enormous by any historical standards. And so far, so good as the counterfactual in the absence of these interventions would probably have been a replay of the Great Depression. The missing ingredient from these interventions was an exit plan for how to return to normality. Strange as it may seem, the current inflation episode might provide just that, at least if not a plan a door into a more normal future. But it will require a clear focus on managing inflation carefully back to levels consistent with price stability.