Central Banks Play Catch-Up on Inflation, Risking Credibility and Future Shock Preparedness

Central banks were slow to respond to rising inflation in 2021, eventually having to raise interest rates much higher than expected.

Inflation remains above targets in many countries, though it is falling in places like Europe where economic growth is weak.

The public now pays closer attention to inflation risks after experiencing high inflation recently, eroding central bank credibility.

Future shocks like pandemics could test central bank credibility further if inflation expectations rise definitively.

Central bankers will likely have to adjust interest rates more quickly and tolerate more economic volatility when inflation fluctuates going forward.