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The Inflation Crisis Is Not Over

Across the developed world, inflation is trending down without significant output losses or mass unemployment. But the world’s major economies are still grappling with enormous inherited imbalances, distorted incentives, and acute moral-hazard risks.

BUENOS AIRES – After more than a year of aggressive monetary tightening, inflation in the United States and around the world is finally trending down. Cautious celebration is in order: monetary policy can be effective, and central banks, after abandoning the fiction of “transitory” inflation, have retained enough credibility to respond effectively.

Contrary to the projections of standard macroeconomic models, and despite the US Federal Reserve raising its policy rate to a 22-year high, the ongoing disinflationary process has not triggered significant output losses or massive unemployment. Apart from some self-inflicted policy mistakes that caused several US banks to fail, disinflation has been relatively painless thus far.

Moreover, emerging markets have taken the lead in fighting inflation, initiating monetary-policy tightening almost a year before the Fed and other major central banks did, and they have successfully avoided the financial stresses that have plagued them during the Fed’s previous tightening cycles.