17  The Great Inflation (2021–2023)

17.1 Supply Shocks and the Return of Inflation

Sharon Kowalski had been keeping her grocery receipts for thirty years. It was a habit inherited from her mother, who had lived through the 1970s and never fully trusted that prices would stay reasonable. In January 2022, Sharon — a retired school administrator in Pittsburgh, living on a fixed pension of $2,800 per month — noticed that the total on her weekly Kroger receipt had risen from its pre-pandemic average of $87 to $124. Eggs were $3.89 per dozen, up from $1.39. Ground beef was $6.49 per pound. Butter was $4.29. The heating bill for her three-bedroom house had risen from $95 to $162 per month.

Sharon had not received a pay rise, because she had not been employed for six years. Her pension did not adjust automatically for inflation. She began doing what millions of retired and low-income Americans did in 2022: working backwards through her monthly expenditures to find what could be cut.

The Great Inflation of 2021–2023 was not the largest peacetime inflation in American history. The 1970s holds that distinction. It was, however, the fastest unanticipated inflation surge in forty years — one that arrived when central banks had explicitly told markets and governments it would not, and one that fell with particular harshness on fixed-income households, renters, and anyone whose wages did not keep pace with rising prices. For those people, the economic disruption was not theoretical. It was a restructuring of daily life, conducted without their consent.

17.1.1 How Inflation Returned

In retrospect — which is where economic causation always looks clearest — the post-pandemic inflation had identifiable inputs that interacted in a combustible sequence.

The first input was demand. American households had accumulated approximately $2.5 trillion in excess savings by mid-2021, the product of stimulus payments received while spending opportunities were curtailed. This money did not sit idle. As reopening accelerated through spring and summer 2021, consumer spending surged in categories that had been suppressed — travel, dining, entertainment, and physical goods — simultaneously and at a pace that supply chains could not accommodate.

The second input was supply. Two years of pandemic-era disruption had stretched global supply chains beyond their design tolerances. Container shipping costs rose 900% between early 2020 and September 2021. Semiconductor shortages cascaded through electronics, automotive, and appliance manufacturing. Port congestion at Los Angeles and Long Beach — the entry point for approximately 40% of US container imports — created backlogs measured in weeks. The labour shortages that emerged when workers delayed their return to employment compounded every node of the supply chain simultaneously.

The third input was energy. Russia’s invasion of Ukraine on February 24, 2022, triggered the largest disruption to European energy markets since the 1973 oil embargo. Russia had supplied approximately 40% of the European Union’s natural gas and 27% of its crude oil imports. As Europe scrambled to replace Russian energy through liquefied natural gas imports and accelerated renewable deployment, global energy prices spiked. Brent crude oil rose from $78 per barrel in December 2021 to $128 in March 2022. European natural gas prices rose to levels equivalent to $500 per barrel of oil in equivalent energy terms.

Energy costs flow through every sector of a modern economy. They are embedded in food production through fertiliser (largely natural gas-derived), in transport through fuel costs, in manufacturing through process heat, and in households through heating and electricity. When energy prices spike, general price levels follow.

The fourth input, which the Federal Reserve would later acknowledge with considerable discomfort, was monetary policy. Interest rates of 0–0.25% and $120 billion per month in asset purchases had been calibrated for an economy in demand collapse. They remained in place through the end of 2021, adding monetary stimulus to an economy that was already running hot.

17.1.2 The “Transitory” Miscalculation

In May 2021, with US CPI running at 4.2% — already double the Fed’s 2% target — Jerome Powell used the word “transitory” to describe what the Federal Reserve expected inflation to do. The Fed’s June 2021 Summary of Economic Projections forecast PCE inflation of 3.4% for 2021 and 2.2% for 2022. The Fed’s December 2021 forecast projected 2022 inflation at 2.6%.

The actual 2022 US CPI was 8%.

This was not a rounding error or a matter of nuance. It was a forecasting failure of the first order, comparable in its consequences to the Federal Reserve’s policy failures of 1929–1933, though in the opposite direction. The Fed had been burned by forty years of chronically below-target inflation and was, in the assessment of several former Fed officials speaking after the fact, psychologically anchored to the expectation that inflation would not return with force.

The “transitory” designation proved self-undermining in a specific way. Because the Fed anticipated that inflation would resolve itself, it delayed tightening monetary policy until March 2022. By then, US CPI had been running above 5% for nine consecutive months and above 7% for three months. The delay compressed the subsequent tightening into a more rapid, more disruptive trajectory than would have been required had tightening begun in mid-2021.

17.1.3 The Rate Rise Begins

On March 16, 2022, the Federal Open Market Committee raised the federal funds rate by 25 basis points — the first increase since December 2018. CPI was 7.9% on the day of the decision. The committee projected the funds rate would reach 1.9% by year end. It would in fact reach 4.25–4.5% by December 2022 and 5.25–5.5% by July 2023.

For the millions of households — and the central banks, finance ministries, and mortgage lenders across the developed world — who had structured their financial decisions around the assumption that near-zero interest rates were a permanent feature of the economic landscape, the reckoning that followed was seismic. The numbers say how large. The next chapter shows what they mean.

17.2 Transitory or Structural? The Forecasting Failure

The inflation that emerged in 2021 and peaked across most major economies in 2022 was unusual in the history of postwar price crises because it was caused by the simultaneous activation of multiple independent inflation mechanisms, each of which would have been manageable alone. The supply chain disruptions from the pandemic constrained the production of goods. The fiscal stimulus — $5.8 trillion in the United States alone — had maintained and expanded household purchasing power through the pandemic and generated $2.5 trillion in accumulated consumer savings. The invasion of Ukraine by Russia in February 2022 produced a commodity shock that pushed energy prices to levels not seen in a generation and sent global food prices to forty-year highs. Corporate profit margins expanded as firms, finding they could raise prices without losing customers, took advantage of reduced competitive pressure in concentrated industries.

US inflation reached 9.1% in June 2022 — the highest reading since November 1981. UK inflation reached 11.1% in October 2022, the highest since 1981. Eurozone inflation peaked at 10.6% in the same month, a figure without precedent since the euro’s creation. Real wages in the United States fell for 24 consecutive months between April 2021 and March 2023 — the longest sustained decline since the stagflation era — despite nominal wage growth running at historically elevated 5-7% per year. Workers were receiving the largest pay increases of their working lives and still falling behind. The political salience of this gap was immediate and global: cost-of-living concerns became the first or second ranked political issue in every major democracy by late 2022.

Central bank credibility was additionally at stake in a way that compounded the economic problem. Every major forecasting institution — the Federal Reserve, the IMF, the ECB, the Bank of England — had predicted 2022 inflation at 2.6-3.5%. The actual outcomes were 8-9%. The systematic underestimation, based on models built for the low-inflation world of 1995-2020, meant that central banks had been too slow to tighten, and that when they did tighten, they had to move fast enough to visibly re-establish credibility as inflation fighters.

17.2.1 The US Federal Reserve: Delayed Then Aggressive

The Federal Reserve’s response to the Great Inflation followed a distinctive two-phase trajectory that became both its most criticized feature and, arguably, its ultimate vindication.

In 2021, as inflation rose from 2.6% in January to 7.0% in December, the Fed maintained its assessment that the inflation was “transitory” — a temporary consequence of supply chain disruptions and pandemic reopening dynamics that would resolve without requiring monetary tightening. Jerome Powell later acknowledged publicly that the “transitory” characterisation was a mistake. The December 2021 pivot — dropping the transitory language and signalling imminent tightening — came later than many economists believed appropriate.

When tightening began in March 2022, it was aggressive by any modern standard. The Fed raised its benchmark rate eleven times between March 2022 and July 2023, moving from 0.25% to 5.5% — a cumulative 525 basis points in seventeen months. Four consecutive 75-basis-point increases from June through November 2022 were unprecedented in the modern Federal Reserve’s history; no previous FOMC had moved by 75 basis points at a single meeting since 1994. The speed reflected both the urgency of the inflation and Powell’s awareness that visible action was necessary to anchor inflation expectations before they became self-fulfilling.

The US ultimately achieved what economists call a “soft landing” — inflation falling from 9.1% to 2.4% without the unemployment rate exceeding 4%. Historically, this combination is extremely rare. Of fourteen Fed tightening cycles since 1965, eleven were followed by recession. That the US avoided recession in this cycle remains one of the more debated outcomes in recent macroeconomic history.

17.2.2 The European Central Bank: Tightening Into Fragility

The ECB faced the same inflation problem as the Fed but with a structural constraint that the Fed did not share: the Transmission Protection Instrument.

The Eurozone is a currency union without fiscal union, meaning that a single monetary policy must serve economies at very different stages of their business cycles and with very different debt loads. When the ECB raises rates, it raises them for Germany and for Italy simultaneously, despite the fact that Italy’s debt-to-GDP ratio of 144% makes it far more sensitive to interest rate increases than Germany’s 66%. Aggressive rate increases that are appropriate for the most resilient Eurozone economies can trigger sovereign debt stress in the most fragile ones — a dynamic that had nearly destroyed the euro in 2011-2012.

The Transmission Protection Instrument, announced in July 2022, was the ECB’s mechanism for addressing this constraint: a commitment to purchase sovereign bonds of member states facing “unwarranted” increases in borrowing costs, provided those countries were complying with EU fiscal rules. It was, in structural terms, a version of the Draghi “whatever it takes” commitment of 2012, operationalised as a formal instrument rather than a president’s promise.

The ECB tightened rates from -0.5% in July 2022 to 4.0% by September 2023 — substantial tightening, though starting from a more negative baseline than the Fed. The outcome was a Eurozone that brought inflation down to target but at the cost of a recession in Germany — the EU’s largest economy — which contracted 0.3% in 2023. European industrial production, particularly in energy-intensive manufacturing and chemicals, faced a structural challenge that rate policy could not address.

17.2.3 The Bank of England: Tightening With Inherited Weakness

The United Kingdom combined the standard inflation problem with three complicating factors that made its situation distinctive among major economies.

First, the post-Brexit trade frictions had raised effective import prices and reduced labour supply in sectors that had relied on EU workers, creating a supply-side weakness that pre-dated the inflation and made it harder to contain. Second, the UK mortgage market is structured around 2- and 5-year fixed terms rather than the 30-year fixed mortgages standard in the US, meaning that rate increases transmitted directly and rapidly to household budgets as mortgages came up for renewal. An estimated 1.5 million UK households faced remortgaging in 2023 at rates 4-5 percentage points above their expiring fixed terms.

Third, and most dramatically, the September 2022 “mini-budget” designed by Chancellor Kwasi Kwarteng and Prime Minister Liz Truss — £45 billion in unfunded tax cuts announced alongside projected energy support spending — triggered a gilt market crisis that sent UK government borrowing costs sharply higher and pushed mortgage rates above 6% within days. The Bank of England was forced to intervene in the gilt market to prevent pension fund insolvencies. Kwarteng was dismissed after 38 days. Truss resigned after 45 days — the shortest Prime Ministerial tenure in modern British history. The episode demonstrated, more vividly than academic literature could, what happens when fiscal policy moves in the opposite direction from monetary policy during an inflation.

17.2.4 Hungary, Turkey, and the Heterodox Alternative

Against the orthodoxy of rate increases, two countries offered deliberate experiments in the opposite direction.

Hungarian Prime Minister Viktor Orbán’s government maintained artificially capped interest rates for longer than neighbouring central banks and combined this with price controls on fuel and basic food items. The approach delayed the domestic transmission of inflation in the short term but did not prevent it: Hungarian inflation reached 25.7% in January 2023, among the highest in the EU, before rate normalization was undertaken.

Turkey’s approach, under the intellectual direction of President Recep Tayyip Erdogan, was more radical and more consequential. Erdogan had publicly argued that high interest rates cause inflation rather than reduce it — an inversion of conventional monetary theory with little empirical support. Through 2021 and into 2022, the Central Bank of the Republic of Turkey cut rates despite rising inflation, repeatedly dismissing central bank governors who disagreed. The lira collapsed 44% against the dollar in 2021 alone. Turkish inflation reached 85.5% in October 2022. The experiment in heterodox monetary policy produced the most severe inflation in modern Turkish history and a currency crisis that destroyed household purchasing power for millions of ordinary Turks who had no ability to hold foreign assets.

17.2.5 Argentina’s Chronic Crisis and Milei’s Shock Therapy

Argentina’s inflation problem predated the global episode and reflected chronic fiscal imbalances and institutional dysfunction that had resisted reform for decades. By December 2023, Argentine inflation had reached 211% annually.

The response came in the form of Javier Milei’s election in November 2023 on a radical libertarian platform that included the proposed elimination of the central bank and dollarisation of the Argentine economy. The immediate post-election package included a 50% devaluation of the peso and drastic cuts to public spending. The shock therapy approach — deliberately painful in the short term in order to break inflationary expectations — represented an extreme version of the orthodox tightening strategy deployed by the Fed and ECB, executed under conditions of far greater existing distress.

17.2.6 Energy Subsidies Versus Rate Hikes

Germany and France both deployed large-scale energy price caps in 2022 — Germany committing approximately €200 billion in energy support, France maintaining regulated electricity tariffs that substantially dampened headline inflation relative to market prices. The UK’s Energy Price Guarantee provided equivalent protection.

These supply-side interventions accomplished their immediate objective of reducing reported headline inflation and preventing the worst household hardship. They also added substantially to sovereign debt at a time when rising interest rates were already increasing debt service costs. Whether they represented a more efficient approach to reducing economic pain than the same fiscal resources deployed as direct transfers — allowing households to choose how to absorb higher energy costs — remains debated. What is not debated is that they kept measured inflation lower than the underlying market price dynamics would have produced, and that this made the task of central banks, which target measured inflation, somewhat easier.

The Great Inflation confronted every major economy with a core dilemma: how much economic pain was appropriate to purchase price stability, and who should bear it? The answers differed by country, by political system, and by institutional capacity. The divergence in outcomes that followed reflected those differences with unusual clarity.

17.3 The Rate-Tightening Cycle

Jerome Powell’s prepared remarks for the Jackson Hole Economic Symposium ran to 1,300 words. He could have said them in five minutes. He took eight. When he finished, the S&P 500 had lost $1.3 trillion in market value in a single afternoon, and Federal Reserve officials who had worried about communicating a policy shift clearly felt they had achieved their objective.

The speech’s core was a single sentence: “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” Powell had spent six months being asked whether the Fed could achieve a soft landing — reduce inflation without causing a recession. At Jackson Hole, he stopped answering that question and replaced it with a different one: price stability would be restored, and the restoration would have costs. He then quoted Paul Volcker at length.

The “pivot” that financial markets had been expecting — a signal that rate hikes were slowing or ending — did not come. What came instead was explicit warning that the Fed was prepared to accept the economic damage that a sustained fight against inflation would require. “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said. “The historical record cautions strongly against prematurely loosening policy.”

The speech was a commitment device. Its function was to make reversal politically costly. And it worked.

17.3.1 The Fed Tightening Cycle: Eleven Hikes

The Federal Reserve’s tightening cycle began on March 16, 2022, with a 25 basis point rate increase — the first rate hike since December 2018. The target range moved from 0 to 0.25 percent to 0.25 to 0.5 percent. It was a modest start to what would become the most aggressive tightening cycle since Volcker.

The pace accelerated rapidly. The May 2022 meeting delivered 50 basis points — the largest single increase in twenty-two years. June 2022 delivered 75 basis points — the largest since 1994. Four consecutive 75 basis point increases followed, in June, July, September, and November 2022. By December 2022, the target range stood at 4.25 to 4.5 percent — a cumulative increase of more than 4 percentage points in nine months.

The pace then slowed. A 50 basis point increase in December 2022, a 25 basis point increase in February 2023, another in March, another in May, another in July 2023. The final hike, on July 26, 2023, brought the target range to 5.25 to 5.5 percent — the highest level since January 2001.

In total: eleven rate increases between March 2022 and July 2023, moving the federal funds rate from near zero to 5.25 to 5.5 percent — a cumulative increase of 525 basis points in sixteen months. This was the fastest sustained tightening cycle since the Volcker era.

The Fed then held rates at 5.25 to 5.5 percent through the remainder of 2023 and into 2024, maintaining a restrictive policy stance even as inflation declined — accepting the risk of over-tightening rather than under-tightening, as Powell had signaled at Jackson Hole.

17.3.2 Balance Sheet Reduction

The Fed’s balance sheet, which had expanded to approximately $9 trillion during the pandemic — more than double its pre-pandemic level — began shrinking in June 2022 through a process the Fed called Quantitative Tightening.

The mechanism was passive: the Fed stopped reinvesting the proceeds of maturing securities rather than actively selling assets into the market. The initial caps were $47.5 billion per month ($30 billion in Treasuries, $17.5 billion in MBS), doubling to $95 billion per month ($60 billion and $35 billion) from September 2022.

Progress was gradual. By the end of 2023, the balance sheet had declined from $9 trillion to approximately $7.7 trillion — a reduction of $1.3 trillion in eighteen months. The $1.5 trillion reduction target implied several additional years of runoff at the prevailing pace before the balance sheet returned to anything close to pre-pandemic norms, and the practical lower bound — the level of reserves needed to maintain smooth money market functioning — remained uncertain.

Quantitative Tightening had less certain effects on financial conditions than rate increases. Academic research on QT’s transmission mechanism was less developed than for rate policy, and the experience of 2019 — when a previous QT episode had produced money market disruptions that forced the Fed to abruptly halt balance sheet reduction — had made Fed officials cautious about the pace.

17.3.3 Fiscal Consolidation: The Pay-Fors

The fiscal policy response to the inflation episode was constrained by the political composition of Congress and by the economic theory that fiscal expansion had contributed to the inflation. The two major pieces of legislation passed in 2022 incorporated fiscal offsets — “pay-fors” — that were designed to be deficit-neutral or deficit-reducing over ten years, limiting their inflationary impact.

The CHIPS and Science Act, signed August 9, 2022, provided $52.7 billion in direct subsidies for domestic semiconductor manufacturing and $200 billion in authorized science research spending. The semiconductor subsidies were direct grants to manufacturers — Intel, TSMC, Samsung, and Micron among the recipients — contingent on domestic production commitments. The act’s purpose was partly strategic (reducing dependence on Taiwan Semiconductor Manufacturing Company for advanced chips) and partly supply-side (increasing domestic productive capacity to reduce inflationary bottlenecks). The manufacturing subsidies were funded through discretionary appropriations rather than tax revenues.

The Inflation Reduction Act, signed August 16, 2022, was the largest climate investment in American history — $369 billion in clean energy and climate provisions over ten years — combined with health care provisions that capped Medicare prescription drug costs and allowed the government to negotiate drug prices. The IRA was funded through a 15 percent corporate minimum tax on book income (estimated to raise $222 billion over a decade), a 1 percent excise tax on stock buybacks ($74 billion), and enhanced IRS enforcement ($124 billion). The Congressional Budget Office scored the IRA as deficit-reducing by approximately $305 billion over ten years. Whether the IRA reduced inflation in the near term was disputed — the climate investments deployed demand while the tax provisions removed it — but its fiscal impact was contractionary compared to deficit-financed alternatives.

17.3.4 Energy Policy: Strategic Petroleum Reserve and LNG

The most immediate policy response to the energy price surge — driven by Russia’s February 24, 2022 invasion of Ukraine and the subsequent embargo of Russian energy exports by Western nations — was the largest release from the Strategic Petroleum Reserve in its fifty-year history.

Beginning March 31, 2022, the Biden administration authorized the release of 180 million barrels from the SPR over six months — roughly one million barrels per day, equivalent to about 1 percent of global daily consumption. Other International Energy Agency members coordinated additional releases of approximately 60 million barrels. The combined release partially offset the loss of Russian exports (approximately 3 million barrels per day had been redirected from European markets).

The SPR release contributed to Brent crude oil prices falling from a peak of $128 per barrel in March 2022 to $83 per barrel by November 2022. The causal attribution is contested — global demand reduction as China maintained COVID restrictions and fears of recession mounted also contributed — but the timing correlated with the release. By late 2023, the SPR stock stood at approximately 350 million barrels, down from 592 million at the start of 2021, and refilling at below-market contracted prices was underway.

Liquefied natural gas exports to Europe became a strategic priority as European nations sought to replace Russian pipeline gas. US LNG export capacity, which had been approximately 10 billion cubic feet per day before the Ukraine invasion, was running at near-maximum utilization through 2022 and 2023. New LNG export terminal approvals and construction accelerated. The resulting increase in US gas exports contributed to higher domestic natural gas prices but provided European buyers with an alternative to Russian supply that had geopolitical significance beyond its economic cost.

17.3.5 European Energy Price Interventions

European governments faced a more acute energy price crisis than the United States because of their higher dependence on Russian gas and because European wholesale electricity markets are structured so that the marginal price of electricity across the system is set by the most expensive generator — which in a crisis is almost always gas. Wholesale electricity prices in some European markets reached ten times their pre-crisis levels in late 2022.

Germany committed €200 billion in its “defensive shield” — the largest single national energy support program in European history. The funds were used to cap wholesale gas prices for industrial users, subsidize household energy costs, and backstop gas importers and utilities that faced margin calls on energy hedges as prices moved against them. The German government nationalized Uniper, the country’s largest gas importer, in December 2022 after it became insolvent.

The UK’s Energy Price Guarantee, announced September 8, 2022 — the last act of Liz Truss’s government before she resigned — capped household energy bills at £2,500 per year for the average household. The guarantee was subsequently modified by the Sunak government to allow bills to rise toward market levels as wholesale prices fell, but the support program remained in place through 2023 at reduced levels. Total UK energy support spending through 2023 was estimated at approximately £70 billion.

17.3.6 Supply Chain Normalisation

The inflationary pressures from goods markets — which had been more intense and more novel than the energy and housing components — unwound through 2022 and 2023 as supply chains normalised and goods demand rotated back toward services.

Container shipping costs, which had peaked at approximately $11,000 per forty-foot equivalent unit on the major trans-Pacific routes in September 2021, fell to approximately $1,000 by the end of 2023 — a decline of roughly 90 percent from peak. The driver was a combination of new vessel capacity coming online (ordered during the high-price period), demand normalisation as consumer spending shifted from goods back to services, and the resolution of the specific port congestion that had been amplifying spot rates.

Semiconductor lead times, which had extended to 52 weeks or more at the 2021 peak, normalised to historical averages of 12 to 16 weeks by late 2023 as production expanded and the auto industry’s inventory rebuild slowed. Used car prices, which had risen 45 percent from pre-pandemic levels at their peak, fell approximately 20 percent from that peak by late 2023 as new car inventories rebuilt.

The Federal Reserve Bank of New York’s Global Supply Chain Pressure Index, which measures supply chain stress across multiple dimensions, fell from a peak of 4.3 standard deviations above its historical mean in December 2021 to below zero — below-average stress — by June 2023. The supply-side inflationary pressures that had been most distinctive about the post-pandemic inflation episode had substantially resolved within roughly two years of the supply chain’s peak dysfunction.

The disinflation that resulted from this combination — restrictive monetary policy, modest fiscal consolidation, energy price stabilisation, and supply chain normalisation — moved headline CPI from its 9.1 percent peak in June 2022 to 3.4 percent by December 2023. Whether that represented a complete return to the 2 percent target — and at what cost in lost output and employment — was the subject of the next chapter’s accounting.

17.4 Soft Landing or Unfinished Business?

Economic history offers a discouraging prior for central banks attempting to reduce high inflation without causing a recession. Of the fourteen Federal Reserve tightening cycles since 1965, eleven produced recession within two years. The standard mechanism is straightforward: higher borrowing costs reduce business investment, cool consumer spending, raise unemployment, and thereby reduce the wage and price pressures sustaining inflation. But the transmission from rate increases to recession is rarely so precise that the central bank can stop exactly at the threshold of price stability without crossing into contraction.

By the end of 2023, the United States had crossed that threshold without falling into recession — a rarity significant enough that economists debated whether to classify it as a genuine soft landing or a “not yet” landing whose consequences were still arriving through monetary policy’s long and variable lags. US inflation fell from 9.1% in June 2022 to 2.4% by September 2024. Unemployment rose from 3.5% to a peak of 4.3% before declining again. GDP growth remained positive throughout. Whether the Fed deserved credit for this outcome, or whether supply chain normalisation and energy price declines did most of the work while monetary policy took the credit, became the central interpretive debate of the episode.

17.4.1 Positive Results

The US soft landing is the clearest positive result, and its rarity warrants emphasis. The combination of 9.1%-to-2.4% disinflation with unemployment remaining below 4% throughout the tightening cycle has no direct parallel in the postwar Federal Reserve record. The closest analogues — the 1994-1995 tightening cycle under Alan Greenspan, which avoided recession, and the 1984 disinflation — operated from lower inflation starting points and involved less aggressive rate movements. That Powell’s Fed achieved what Volcker’s did not — inflation reduction without a deep recession — is, at minimum, a significant institutional accomplishment.

The Great Inflation accelerated the transition to energy security investments that had been advocated for years but lacked political urgency. The Inflation Reduction Act of August 2022, while named for inflation, was primarily a $369 billion clean energy and climate investment package designed to reduce US dependence on imported fossil fuels and accelerate the green energy transition. The energy price shock of 2021-2022 provided the political conditions for its passage. IRA investments in solar, wind, battery storage, and electric vehicles committed to a structural reduction in US exposure to global fossil fuel price shocks — a supply-side response to an energy inflation that rate increases could not address. By 2023, US clean energy investment had reached $303 billion annually, nearly double the 2020 figure.

Central bank independence was reinforced, paradoxically, by the willingness of central banks to impose pain. By maintaining rate increases through 2022 and into 2023 despite political pressure to ease — congressional criticism of the Fed was intense in mid-2022 — the Fed and its counterparts demonstrated that their commitment to the inflation mandate was not conditional on political comfort. Inflation expectations, as measured by survey data and market-based indicators, remained anchored near 2% throughout the episode. That anchoring — the belief by workers and firms that central banks would ultimately succeed — was itself disinflationary, reducing the wage-price spiral dynamics that had made the 1970s inflation so persistent.

17.4.2 Negative Results

The cumulative real wage loss in the United Kingdom between 2021 and 2023 reached approximately 3.5% — the largest sustained fall in British living standards since the 1970s. UK household real disposable income fell for seven consecutive quarters. Food bank usage reached record levels: the Trussell Trust, which operates the UK’s largest food bank network, reported a 37% increase in food parcels distributed in 2022-2023 relative to 2019-2020. The severity of the UK experience reflected the compounding of common inflationary pressures with the specific UK vulnerabilities of mortgage market structure, post-Brexit supply constraints, and the Truss budget crisis.

Germany’s 2023 recession — GDP contracted 0.3% for the year, following stagnation in 2022 — was the most visible symbol of the inflation’s structural damage to European industrial competitiveness. German industrial output, which had sustained the Eurozone’s export performance through multiple prior crises, faced a fundamental challenge: the cheap Russian natural gas on which energy-intensive German manufacturing had depended was gone, and no alternative source restored its price or reliability. Chemical producers, glass manufacturers, and aluminium smelters faced input cost structures that made European production uncompetitive against Asian and North American alternatives. The German model’s vulnerability to an energy price discontinuity had been identified by economists for years; the Great Inflation made it quantitatively urgent.

Globally, the food and energy price shocks fell hardest on populations with the least capacity to absorb them. The World Food Programme estimated that 70 million additional people were pushed toward acute food insecurity in 2022 relative to 2019 baselines — not because the world lacked food, but because global commodity price increases denominated in dollars translated into unaffordable staples for populations in sub-Saharan Africa, South Asia, and Latin America whose incomes were not rising in dollar terms. Approximately 50 million Europeans entered fuel poverty — spending more than 10% of household income on energy — in 2022, despite the approximately €800 billion in European energy support schemes that cushioned the shock for many more.

Silicon Valley Bank’s collapse in March 2023 illustrated the fragility that rapid rate increases created in institutions that had managed their balance sheets for a near-zero rate environment. SVB had purchased long-duration government bonds when rates were near zero and held them to maturity on the assumption that rates would not rise sharply. When rates rose 525 basis points in seventeen months, the market value of those bonds fell far below book value. When SVB’s depositors — concentrated in the venture capital community, connected by the same communication networks and subject to coordinated panic — began withdrawing funds simultaneously, the bank collapsed in 48 hours. The Federal Deposit Insurance Corporation guaranteed all deposits, preventing contagion. But the episode demonstrated that the very rate increases designed to fight inflation had created a category of balance sheet risk that regulators had not specifically examined.

17.4.3 Neutral and Mixed Results

The central interpretive ambiguity of the Great Inflation’s resolution is the attribution problem: how much of the disinflation did monetary policy cause, and how much would have happened regardless as supply chains normalised and energy prices fell?

Research published through 2023 by Olivier Blanchard, Ben Bernanke, and economists at the Federal Reserve itself suggested that supply-side factors — supply chain normalisation, declining shipping costs, energy price retreat — accounted for a substantial portion of the disinflation. Container shipping rates, which peaked at over $11,000 per forty-foot equivalent unit in September 2021, had fallen below $2,000 by late 2022 — before most of the rate increases had time to take effect through the economy. Global food prices peaked in March 2022, shortly after the Ukraine invasion, and declined steadily thereafter as alternative supply routes were established. If the analysis is correct that supply chains did most of the work, then the Fed’s 525 basis points of rate increases may have been more than necessary for the achieved outcome — and the households and businesses that paid higher borrowing costs paid, in part, for a disinflation that was occurring independently.

The monetary policy frameworks of major central banks were reviewed and clarified in the aftermath of the episode, but without definitive institutional reform. The Fed’s “flexible average inflation targeting” framework — adopted in August 2020 and intended to allow inflation to run modestly above 2% after periods of below-target inflation — was widely credited with having contributed to the “transitory” assessment that delayed tightening. Whether to modify the framework, tighten the operational definition of the average, or shorten the permitted tolerance period became an active debate in central banking circles.

The political consequences of the inflation were sweeping and still unfolding. The cost-of-living crisis became the dominant political issue across most major democracies by 2023. Incumbent governments in the United Kingdom, France, Germany, Poland, and the United States faced voter anger whose intensity reflected both the objective economic pain and the subjective sense that the inflation was unfair — that prices had been raised by firms that were not themselves suffering, while wages lagged, savings eroded, and mortgages increased. In many countries, the political beneficiaries were parties that offered simple explanations for complex multi-causal phenomena. Whether the economic resolution was sufficient to contain those political dynamics, or whether the inflation of 2021-2023 will be remembered primarily as an economic event or as the economic catalyst for a political realignment, is a judgment that belongs to the historians who will write about the 2020s from the outside.

The Great Inflation was, in its resolution, a demonstration of what modern macroeconomic policy can do: it can bring inflation down without catastrophe. What it cannot do — what no combination of interest rates and fiscal transfers has yet shown the capacity to do — is distribute the costs of that resolution equitably across the population that endures it.