Central banks are determined to bring inflation back under control. This was the message from Jay Powell, chair of the Federal Reserve, and Isabel Schnabel, an influential member of the board of the European Central Bank at the Jackson Hole symposium last week. So, why were the central banks so insistent on this message? Are they right? Above all, what might it imply for future policy and the economy?
“Reducing inflation is likely to require a sustained period of below-trend growth . . . While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” These were the words of Powell. Again, Schnabel argued that central banks must act decisively, since exp