Post-Pandemic Global Inflation, Disinflation, and Central Bank Policy Responses: A Review of the Facts, Empirical Findings, and their Implications for Monetary Policy Framework Assessments

This paper examines the 2021-2022 global inflation surge and the belated but aggressive monetary policy response to it by advanced economy central banks. Drawing on body of recent empirical research, it identifies three primary drivers of the global inflation surge: supply shocks from pandemic disruptions and Russia’s invasion of Ukraine, accommodative fiscal and monetary policies that responded to the economic dislocation caused by pandemic, and a demand shift toward goods relative to services, that exacerbated supply chain pressures. Advanced economy central banks were initially slow to react but ultimately raised rates aggressively and succeeded, with help from a reversal of the initial supply shocks which contributed to the initial inflation surge, in returning inflation to “2 point something” were confident enough in the prospects for further disinflation to began cutting interest rates by the summer of 2024. The paper explores benefits and costs of proposals to make forward guidance on the policy rate and the balance sheet more robust and considers the benefits and costs of incorporating scenario analysis into the communication toolkit.