The War on Inflation

With prices already increasing at the fastest rate in a generation in the United States, Europe, and other advanced economies, more expensive oil and gas will further complicate the task facing central bankers. Monetary policymakers may soon have to make an unpalatable choice between choking off the economic recovery and de-anchoring inflation expectations.

In this Big Picture, Mohamed A. El-Erian of Queens’ College at the University of Cambridge says the US Federal Reserve’s recent series of inflation mistakes means that its next policy decision also will likely be suboptimal. And Columbia University’s Willem H. Buiter thinks that, with price growth surging, insufficiently aggressive interest-rate hikes could jeopardize the Fed’s credibility.

Nobel laureate economist Joseph E. Stiglitz, however, thinks monetary policy is not the best tool, and calls instead for targeted supply-side policies, arguing that raising interest rates excessively to tackle inflation would hurt those at the bottom of the income scale the most. Likewise, Edward N. Wolff of New York University shows how higher inflation in the US helps to limit both overall wealth inequality and racial and ethnic wealth gaps.

That doesn’t change the fact that the Fed got it wrong. Harvard University’s Jeffrey Frankel explains why monetary policymakers underestimated the danger of inflation in 2021, and urges them to adopt a longer-term historical perspective when gauging price pressures. But Mario I. Blejer, a former president of the Central Bank of Argentina, and Piroska Nagy-Mohacsi of the London School of Economics think the bigger problem is the rampant moral hazard – and thus increased risk-taking – resulting from central banks’ commitment to do “whatever it takes” to prop up financial markets.