Inflation is the rate at which prices for goods and services are rising. It is typically measured as a percentage change in the consumer price index (CPI) over some time. A low rate of inflation is generally considered to be a sign of a healthy economy, but too much inflation can erode purchasing power and make it difficult for people to save money.

In 2022, inflation reached multi-decade highs in many countries around the world, driven by a combination of factors including the COVID-19 pandemic, supply chain disruptions, and the war in Ukraine.

Supply-side factors

The COVID-19 pandemic caused widespread disruptions to global supply chains, making it more difficult and expensive to produce and transport goods. This led to shortages of some goods, which in turn drove up prices.

The war in Ukraine has also had a significant impact on global supply chains. Russia and Ukraine are both major exporters of wheat, sunflower oil, and other agricultural commodities. The war has disrupted the production and shipping of these goods, leading to higher prices for consumers around the world.

Demand-side factors

In addition to supply-side factors, inflation has also been driven by strong demand. As economies have reopened after the COVID-19 pandemic, consumers have spent more money on goods and services. This increased demand has put upward pressure on prices.

Central bank response

Central banks around the world are responsible for managing inflation. They do this using various tools, including interest rates, asset purchases, and forward guidance.

Interest rates are the most important tool that central banks have to control inflation. When central banks raise interest rates, it becomes more expensive to borrow money. This can discourage businesses from investing and consumers from spending, which can help to cool demand and bring inflation under control.

Central bank actions in 2022 and 2023

In 2022, central banks around the world began to raise interest rates to combat inflation. The US Federal Reserve (Fed) began raising rates in March 2022, and it has since increased rates by a total of 2.25 percentage points. The European Central Bank (ECB) began raising rates in July 2022, and it has since increased rates by a total of 0.5 percentage points. The Bank of England (BoE) began raising rates in December 2021, and it has since increased rates by a total of 1.5 percentage points.

In 2023, inflation has begun to moderate in some countries, but it is still above target in most cases. Central banks are continuing to raise interest rates, but some are starting to signal that they may be nearing a pause.

The impact of central bank actions

It is important to note that the impact of monetary policy changes takes time to be felt. As a result, it is too early to say for sure whether central banks have been successful in bringing inflation under control.

However, there are some early signs that central bank actions may be having the desired effect. For example, in the United States, inflation has slowed in recent months. Additionally, the US housing market is cooling off, which is a sign that higher interest rates are starting to impact economic activity. The Federal Reserve (Fed) began raising interest rates in March 2022. It has since raised rates by a total of 2.25 percentage points, and it is expected to continue raising rates at upcoming meetings. The Fed has also begun to reduce its balance sheet, which is a process of selling off assets that it acquired during the pandemic. This is another way that the Fed is trying to tighten monetary policy and bring inflation under control.

The European Central Bank (ECB) began raising interest rates in July 2022. It has since raised rates by a total of 0.5 percentage points, and it is expected to continue raising rates at upcoming meetings. The ECB has also signaled that it will begin to reduce its asset purchases in the near future. This is another way that the ECB is trying to tighten monetary policy and bring inflation under control.

Uncertainties ahead

In recent weeks, inflation has started to increase again in some countries. This has led to concerns that central banks may not have been aggressive enough in raising interest rates. Additionally, the ongoing war in Ukraine and other geopolitical tensions are creating further uncertainty for the global economy.

It is unclear how central banks will respond to these challenges. Some may be forced to raise interest rates even more aggressively than previously planned. Others may be reluctant to raise rates further, given the risk of triggering a recession.