Central banks are determined to bring inflation back under control. This was the message from Jay Powell, chair of the Federal Reserve, and Isabel Schnabel, an influential member of the board of the European Central Bank at the Jackson Hole symposium last week. So, why were the central banks so insistent on this message? Are they right? Above all, what might it imply for future policy and the economy?

“Reducing inflation is likely to require a sustained period of below-trend growth?.?.?.?While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” These were the words of Powell. Again, Schnabel argued that central banks must act decisively, since expectations risk being de-anchored, inflation has been persistently too high, and the costs of bringing it under control will rise the longer action is delayed. There are risks of doing too much and of doing too little. Yet “determination” to act is a better choice than “caution”.

It is not difficult to understand why central bankers say what they are saying. They have a clear mandate to control inflation on which they have failed to deliver. Not just headline inflation, but core inflation (excluding energy and food) has been above target for a prolonged period. Of course, this unhappy outcome has much to do with a series of unexpected supply shocks, in the context of the post-pandemic shift towards consumption of goods, the constraints on energy supply and now the war in Ukraine. But the scissors have two blades: demand, as well as supply. Central banks, notably the Fed, persisted with the pandemic’s ultra-loose policies for too long, though US fiscal policy was also too expansionary.