Policymakers are likely to jettison their 2% inflation targets

THE LAST time rich economies conquered inflation it ushered in a decades-long era known as the “great moderation”. From the mid-1980s to 2007 growth was steady, inflation was low and economists celebrated their own “end of history”: the triumph of inflation-targeting technocracy over the naivety of 1970s policymaking. The economy was steered by a simple division of labour. Central banks would use monetary policy to keep inflation on target—typically at 2%—while governments would keep debts under control and focus on supply-side reforms.

This stability was shattered by the financial crisis. The 15 years since have exposed flaws in the macroeconomic regime. When interest rates fell to zero, central banks could not easily cut them further, making recovery from the crash slow and painful. When the pandemic struck, policymakers feared a repeat and so reached for alternatives: an enormous expansion of government spending and quantitative easing (QE), the buying of public debt with newly created money, whose full effects were poorly understood. The experiment went wrong, particularly in America. Inflation returned with a vengeance, and has since been worsened by an energy crisis—the response to which in Europe has been another round of government spending on a vast scale.