Central banks were caught off guard by the inflationary surge of 2021–23 because they relied too heavily on inflation forecasts based on flawed models and ignored other warning signs. Their failure to recognize the rapid growth of the money supply, in particular, underscores the need to reassess their reliance on inflation targeting.
FRANKFURT—Following the 2007–08 global financial crisis, the world’s leading central banks spent more than a decade unconcerned about inflation. Instead, they focused their efforts on combating deflationary pressures, while academic discourse was dominated by the notion of secular stagnation and its implications for monetary policy.