Central Banks Are Clearly No Longer Comfortable with High Infation

In an Economic Viewpoint earlier this year, we said raising interest rates isn’t the best way to deal with supply shocks. At the time, we also had good reason to believe some of the ongoing supply issues would clear up this year, helping to bring down inflation. Unfortunately, that’s looking less and less likely, and central banks now appear more willing to act forcefully. Continuing to hike interest rates won’t fix our supply problems any faster, but it may slow demand growth and help anchor medium- and long-term inflation expectations. And while higher rates could hurt economic growth in the short term, in the long run it’s better for central banks to meet their inflation targets.