Central banks have spent down their credibility

Notlong ago the rich world was braced for a costly battle with inflation. Today it can seem as if the war has been won . In most rich countries annual core inflation, which excludes volatile food and energy prices, has fallen from peaks of 5-8% to a more tolerable 3-5%. In defiance of pessimistic economists, there has been no accompanying economic slump. Growth varies from booming (America) to respectable (Australia, Canada, Japan) to tepid (Britain, the euro area), but nowhere has it collapsed. In contrast to the disinflation of the 1980s, unemployment has stayed low. Has the world economy enjoyed salvation without sacrifice? Sadly, the answer is no; high inflation has left scars.Before the covid-19 pandemic, the rich world enjoyed decades without any serious . After ruthless monetary tightening in the 1980s, followed by a movement towards independent central banks targeting inflation, price surges seemed as outdated as shoulder pads. As firms and workers came to assume that inflation would stay low, they kept prices and wages in check. Their expectations thereby proved self-fulfilling.