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The Real Inflation Culprits

The recent surge in inflation in both the US and Europe has been blamed primarily on supply shocks. But a closer look suggests that the very central banks that are now being praised for reining in the surge in prices played a significant role in causing it.

SOFIA – Advanced-economy central bankers seem to have earned their summer vacation. With a series of sharp interest-rate hikes, they appear to have beaten back a wave of inflation that, according to the conventional wisdom, was caused by an unprecedented combination of negative shocks. But before we praise central bankers for taming inflation, we should consider their role in causing it.

The most commonly cited factor driving the recent surge in inflation is high energy prices, which soared after Russia’s full-scale invasion of Ukraine, owing to fears that Western sanctions would prevent Russian hydrocarbons from reaching markets. But, by early 2023, crude oil prices had fallen back to pre-invasion levels.

More important, the 2022 spike was not exceptional. Oil prices have increased at comparable speeds and reached similar peaks before, such as in 2008 and 2011-12. But neither of those episodes brought a noticeable surge in the price level. Even in Europe, where the increase in natural-gas prices after the invasion was indeed unprecedented, energy prices returned to pre-war levels well before inflation began to fall.

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