ARE CENTRAL BANKS TO BLAME FOR INFLATION?

borrowing costs to 0.25 per cent from 0.1 per cent. The Fed followed in March 2022, then the ECB fired its gun in July 2022.

Everything changed in February 2022.

Russia’s full-scale invasion of Ukraine could not have been foreseen. Its ramifications in energy and food markets were huge.

CPI in the UK jumped two percentage points in April to nine per cent. That was the biggest month-on-month annual increase since June 1979, according to modelled data from the Office for National Statistics.

In the US and eurozone, prices raced ahead. The dynamics required novel responses from central banks and they delivered. The Fed launched four 75 basis point rises. The ECB’s first increase was a smaller 50 basis points.

Those on Threadneedle Street were spurred into such action not by inflation but by the haphazard tax and spending decisions of Liz Truss during her short premiership.

Kudos must be given to the BoE for its handling of that episode. It launched an emergency short-lived bond-buying programme to hose down a fire in UK debt markets. Its 75 basis point increase went a way to tame higher inflation expectations.

Jerome Powell and co at the Fed have arguably been more aware of stimulative fiscal policy nudging up inflation. They went faster and steeper than their peers, partially to offset Americans pumping the up to $2,800 of parachute payments they received during the pandemic into the economy.

about higher interest rates. Or maybe elevated living costs are steering them towards debt. The overall sentiment of the snapshot though was that the full effects of the Bank’s 13 straight interest rate rises have yet to really crunch the economy. Home loans actually rose to 54,700 despite the initial stages of the mortgage rate surge taking place in June. More pain is coming.

supported spending and inflation. The tension between monetary and fiscal policy was there for all to see.

So how have central banks done? Inflation is three per cent in the US (lower than Japan), 5.3 per cent in the eurozone and 7.9 per cent in the UK –all above target.

Doubtless the Fed, ECB and Bank of England have had some of their credibility knocked. Those on Threadneedle Street should be regretful of their terrible forecasting record over the last 18 months.

Central banks, though, as economist Mohamed El-Erian puts it, aren’t the “only game in town”. They are simply inflationstabilising vehicles navigating the economic conditions handed to them. To prevent future inflation flare ups, politicians and business leaders must be bolder. Investment needs jolting, infrastructure must be renewed and better jobs created. Mere tweaks to interest rates will not cut it.