central banks major economies until a few months ago they were expected to be able to tighten their monetary policy very gradually. OUR inflation it appears to have been affected by a paradoxical combination of supply chain shocks, the pandemic, and the recent Russian invasion of Ukraine. In this light, theoretically, after the aforementioned pressure subsides, it will quickly decline. Today, the index has soared to record levels in decades, and with price pressures spreading to the housing market and other services, central banks are realizing the need to move much faster and prevent inflation expectations from spinning out of control and hitting the economy. authenticity. The Federal Reserve, the Bank of Canada and the Bank of England have already raised interest rates significantly and have announced their intention to follow suit and increase them this year. The European Central Bank recently raised the cost of borrowing for the first time in a decade.

The actions of central banks and their announcements about their possible course of action since the beginning of the year have contributed to a significant increase in real (ie, inflation-adjusted) interest rates on government bonds. This development is driving even higher borrowing costs for consumers and businesses, while driving stock prices around the world to plummet. The approach of both central banks and markets suggests that credit tightening will be enough to bring inflation down to its official target relatively quickly. This is reflected in the inflation expectations figures, which show a return to around 2% over the next two to three years in both the US and Germany. Central bank forecasts, such as the Fed’s latest quarterly forecasts, point to a corresponding containment in price growth, which is also reflected in polls of economists and investors. And it makes sense for the following reasons:

– Monetary and fiscal tightening will dampen demand for fuel and other non-energy commodities. This will lead to slower or even lower commodity price growth, and could also lead to lower energy prices, provided there are no disruptions in the commodity market.

“Supply pressure will ease as the pandemic subsides and restrictions and production disruptions ease.

– A slowdown in economic growth will gradually reduce inflation in the services sector and slow wage growth.

* Mr. Tobias Adrian, Mr. Christopher Erzeg and Fabio Natalucci are Director and Associate Director of the IMF’s Capital Markets Department, respectively. The article was published on the IMF blog.