Global central banks at a crossroads: Will the 2022 inflation nightmare return?

Source: 21st Century Economic Herald Author: Bian Wu

In 2022, the supply-side gloom caused by the COVID-19 pandemic had not yet lifted when the Russia-Ukraine conflict suddenly erupted again, and the impact of inflation was still fresh in people’s minds. Even though at the time the price increases in major economies reached double digits, institutions such as the Federal Reserve and the European Central Bank had at one point repeatedly insisted on “the temporary inflation theory.” In the end, they reacted too slowly: inflation stayed stubbornly high, and a range of central banks came under widespread criticism.

Four years later, a similar scene has emerged again. The Iran-U.S. conflict sent oil prices surging past 100, and an inflation storm was set to break out at any moment. This week, around 20 central banks worldwide will hold monetary policy meetings, covering nearly two-thirds of the global economy by size. Among the G10 central banks, eight will make their rate decisions this week. With the new round of inflation threats brought by the Iran-U.S. conflict, many central banks may be forced to delay rate cuts, and in some cases even consider rate hikes.

But for now, policy adjustments are not yet urgent. Besides the Reserve Bank of Australia, which is expected to hike rates again, the Federal Reserve, the European Central Bank, the Bank of England, and others are expected to keep interest rates unchanged while assessing how much soaring energy costs will affect consumer price inflation and economic growth. Going forward, monetary policy will depend largely on how long the Middle East conflict lasts. If the conflict once again pushes up prices, impedes economic growth, or triggers sharp volatility in local currencies, central banks around the world are already prepared to step in at any time.

Will the 2022 inflation nightmare return this time?

Will global central banks repeat the same mistakes?

An Iran-U.S. conflict sparks a new inflation puzzle

Against the backdrop of rising oil prices, the Federal Reserve, the European Central Bank, the Bank of Japan, and others are set to release interest rate decisions this week, and investors are closely watching the key signals that are about to be released.

Wu Qidi, head of research at Yuan Daw Information & Securities Research Institute, analyzed for reporters from 21st Century Economic Herald: “Against the backdrop of the surge in oil prices driven by the Iran-U.S. conflict, each central bank faces the dilemma of containing inflation while stabilizing growth. At present, the ‘data-dependent framework’ has become the common choice for central banks. It is expected that most major central banks will, for the most part, keep interest rates unchanged this week, but their policy guidance will collectively turn ‘hawkish,’ laying the groundwork for subsequent possible tightening.”

Market expectations are that the Federal Reserve will keep rates unchanged this time, but rate-cut expectations have been pushed back significantly. The dot plot may indicate that the number of rate cuts this year will fall to just one. Officials will be assessing the risk of “stagflation.” The European Central Bank is also likely to keep rates unchanged, but may issue more hawkish signals to stabilize market confidence in the inflation target; there is also a possibility of one rate hike within the year. Market expectations are that the Bank of Japan will also keep rates unchanged this time, but inflation acceleration caused by rising energy prices could quicken the pace of its subsequent rate hikes.

Dong Zhongyun, chief economist at Sinotrans Securities, analyzed for reporters from 21st Century Economic Herald: “In recent weeks, the Iran-U.S. conflict has continued to escalate, driving a sharp rise in global oil prices and oil-price expectations. Brent spot prices have already broken through $100 per barrel, and five-month futures prices have also remained above $100. Yet just over two months ago, on the last day of the previous year, Brent spot prices were only $63 per barrel. The steep jump in oil prices injects substantial uncertainty into the global inflation trajectory, which had already been starting to slow.”

“More crucially, the direct trigger of this round’s oil price surge is the Iranian blockade of the Strait of Hormuz. The expected duration of navigation through the strait afterward depends on how the geopolitical game among the United States, Iran, and Israel evolves. The immense uncertainty of geopolitics, using the duration of the Strait of Hormuz blockade as a ‘transmission tool,’ makes the path of global inflation even harder to predict. Dong Zhongyun said, ‘Given that the conflict has been unfolding for only about half a month so far, the actual inflation impact has not yet fully materialized. For major central banks worldwide, keeping a “wait-and-see” stance at this stage—then deciding on the direction of monetary policy once actual inflation data becomes clear—by adopting a “data-dependent framework,” is undoubtedly the relatively rational choice.’”

Specifically, for the Federal Reserve, the European Central Bank, and the Bank of Japan, their situations differ in their own ways.

For the Federal Reserve, Dong Zhongyun emphasized that weak labor market data and persistently rising oil prices make it difficult for the Fed to achieve both its dual mission of controlling inflation and stabilizing the economy at the same time. Therefore, the core signal released this week will most likely be extreme policy patience and considerations for rebalancing the dual objectives. Federal Reserve Chair Jerome Powell may stress that the softness in the February non-farm payroll data needs further observation to determine whether it represents a trend change, while the upside inflation risk stemming from oil price increases also cannot be ignored. Such statements—needing to look at both employment data and inflation data—mean that the market’s earlier expectations for rate cuts will have to be pushed back. At the same time, the Federal Reserve is also likely to indicate that it does not plan to consider rate hikes or it is unwilling to commit to potential future rate hikes, attempting to strike a balance between hawkish inflation realities and dovish worries about employment.

For the European Central Bank, on the one hand, because it is more dependent on external energy; on the other hand, because memories of the energy crisis triggered by the Russia-Ukraine conflict in 2022 remain vivid. In response to the imported inflation pressure caused by the Middle East conflict, the signals the ECB is expected to release will likely be more “hawkish” than those of the Federal Reserve. If energy prices continue to run at high levels, the ECB may further strengthen its vigilance regarding upside inflation risks, and even leave room for tighter policy in the future.

For the Bank of Japan, rising oil prices are a typical stagflation shock for its economy—higher import costs push up imported inflation, but at the same time the surge in energy costs damages both economic growth and corporate earnings. Therefore, Dong Zhongyun believes the signals the Bank of Japan releases will be the most contradictory and cautious. On the one hand, facing the yen’s sharp depreciation to the 160 level and the risk of inflation spiraling out of control caused by potential imported inflation, in theory, hawkish rate hikes are needed to stabilize the exchange rate. But on the other hand, under the current reality of the Japanese government’s high debt levels, aggressive rate hikes could potentially trigger a fiscal crisis and crush a fragile recovery. Moreover, rate hikes would not solve the shortage of energy on the supply side. Therefore, it is expected that the Bank of Japan’s stance will be relatively cautious and restrained, emphasizing that this inflation is a “temporary supply shock,” and hedging energy cost risks by relying on government fiscal subsidies rather than monetary policy. It will also verbally warn the foreign exchange market to prevent excessive yen depreciation.

Major central banks seek a path amid divergence

The Reserve Bank of Australia raised rates in February, becoming the first major developed-market central bank to hike this year, ahead of the Bank of Japan. On March 17, the Reserve Bank of Australia announced an increase in the benchmark interest rate by 25 basis points to 4.10%, marking the second consecutive rate hike since the start of 2024 by the RBA.

Wu Qidi told reporters that behind the rate-hike decision, the Australian economy has shown strong resilience. In the fourth quarter of 2025, GDP grew 2.6% year over year, exceeding potential growth of 2%. In January, CPI inflation rose 3.8% year over year, above the 2%–3% target range. The unemployment rate in the labor market has also remained low.

However, decision-making within the RBA is not unanimous. Notably, this rate-hike decision passed by a narrow margin of 5 to 4, revealing a deep split within the board regarding the economic outlook. Dovish members worry that excessive rate hikes would hurt consumption and economic growth that are already showing signs of fatigue. This also implies that the future rate-hiking path will be highly “data-dependent,” and changes in the data could cause policy to swing.

Dong Zhongyun believes that in this cycle, the RBA has become the first mover on rate hikes because of its unique economic conditions. Unlike other major economies, whose demand has slowed after sustained rate hikes, the Australian economy has displayed clear resilience. For Australia, inflation is driven more by improving domestic business investment and a favorable labor market than by energy price factors coming from the outside. Therefore, Australia’s rate hikes are based on the real need for domestic inflation to flare up again, and the geopolitical events in the Middle East only intensify this necessity rather than being the main cause.

The market expects that the RBA will most likely continue raising rates. The Bank of Japan and the ECB may also hike this year, but the Federal Reserve is unlikely to hike. The outlook for monetary policies among central banks is showing clear divergence.

Australia’s special case highlights that the current global central banks’ monetary policy outlook is taking shape as a multidimensional pattern of divergence, not a simple hawkish-versus-dovish split.

Dong Zhongyun analyzed that for the Federal Reserve, because it lacks the economic footing that would allow it to maintain high interest rates like Australia, and it does not face the same urgency to respond to imported inflation like the ECB, it can only occupy an awkward position of being forced to pause in the rate-cut channel amid the dual predicament of inflation risks and recession risks—making it a typical “data-watching” central bank.

For the ECB, although its economic growth outlook is worse than the United States’, the energy shock it faces is more direct. If the ECB is eventually forced to raise rates in order to deal with imported inflation pressure while growth remains weak, it would be a typical stagflation dilemma caused by a supply shock—similar to the logic of 2022, but with weaker fundamentals on the demand side.

For the Bank of Japan, its situation is the most fragmented. On the one hand, the yen’s depreciation to the 160 level aggravates imported inflation, theoretically requiring rate hikes to stabilize conditions in the foreign exchange market. But on the other hand, the hard constraint of high government debt makes it likely that aggressive rate hikes would trigger a fiscal crisis. As a result, its monetary policy will inevitably face a dilemma of both protecting the currency and protecting fiscal stability.

At a deeper level, Dong Zhongyun emphasized that the core root of this divergence among global central banks lies in the fact that each country is positioned at a completely different point in its demand cycle when responding to the same geopolitical shock.

Behind the divergence in monetary policy are starkly different economic structures. Wu Qidi analyzed that the root of the current divergent outlook among global central banks lies in the fact that the inflation pressures and growth drivers facing each economy are entirely different. The eurozone, as a net energy-importing region, is extremely sensitive to oil price shocks. To curb inflation expectations, the ECB faces increased pressure to raise rates. The Federal Reserve, meanwhile, is trapped in a dilemma at the onset of “stagflation”—cutting rates could raise inflation, while hiking rates could destroy employment. Therefore, it can only wait and observe for more data. The Bank of Japan is more constrained by imported inflation stemming from rising energy prices and yen weakness, and its rate hikes are more intended to normalize monetary policy and ease pressure from yen depreciation.

Will the 2022 inflation nightmare return?

When the Russia-Ukraine conflict erupted in 2022, price increases in major economies reached double digits. If this Iran-U.S. conflict lasts longer, will the 2022 inflation nightmare reappear?

By comparison, Dong Zhongyun believes that there are indeed similarities between the two geopolitical shocks: first, both occurred near key turning points in the monetary policy cycles of global central banks—2022 was at the beginning of a tightening cycle, while now is in the middle of a easing cycle; second, both use energy supply shocks as the core transmission mechanism, directly pushing up global inflation expectations.

However, there are also notable differences in the global economic backdrop when the two conflicts occur. Dong Zhongyun analyzed that first, the demand-side fundamentals differ. When the Russia-Ukraine conflict broke out in 2022, the global economy was already in a phase of post-pandemic demand overheating and high inflation. With supply shocks able to be “absorbed” on the demand side, they clearly boosted inflation. Currently, global economic demand is not overheating but relatively weak, so the transmission of supply factors to inflation will be somewhat suppressed. Second, there is a clear difference in policy space. In 2022, although the rate-hiking process was painful, central banks in various countries still had the necessity and room to hike rates. They could curb inflation through synchronized and aggressive rate hikes. But now, major economies have already gone through multiple rounds of rate cuts and are not in a demand-overheating state; the room for further rate hikes has been significantly compressed. Finally, policy coordination has also shifted from being uniform to diverging. In 2022, facing widespread high inflation, central banks in different countries basically formed a consensus to fight inflation by raising rates, with relatively consistent pacing. But now, global central banks’ monetary policy stances have diverged clearly due to differences in countries’ economic cycles and external conditions.

Therefore, Dong Zhongyun believes that the probability of this crisis leading to a reoccurrence of the 2022-style inflation nightmare is relatively low. A more likely scenario is that major economies fall into a stagflation trap of “wanting to hike but not being able to.” However, it must be kept in mind that if the blockade of the Strait of Hormuz lasts well beyond expectations and geopolitical brinkmanship continues to escalate, it could still form an upside shock to global inflation expectations beyond what was priced in. This tail risk deserves close attention.

Wu Qidi also believes that compared with the Russia-Ukraine conflict in 2022, the macro environment this time has undergone fundamental changes, so the probability of the 2022 inflation nightmare repeating itself is relatively low.

The initial inflation environment differs greatly. Before the 2022 conflict, supply chain disruptions caused by the pandemic and large-scale fiscal stimulus in the United States had pushed inflation to a 40-year high. Now, the year-over-year growth rate of the U.S. CPI has been trending downward since the end of 2025, so the starting conditions are entirely different.

The weight of energy in inflation has also been declining. In the past few years, the share of services inflation has risen, while the weight of energy items in the CPI basket has decreased to some extent. Energy transition has also, to a certain degree, weakened the sensitivity of oil price changes. The experience of 2022 made central banks—especially the ECB—highly alert to inflation caused by energy shocks. Past experience itself can change market expectations and central bank behavior.

Looking ahead, Wu Qidi reminds that the key variables are the duration and intensity of the Iran-U.S. conflict. If the conflict leads to a long-term blockade of the Strait of Hormuz, it will directly evolve into a serious energy supply crisis. This will both push up inflation and suppress economic growth. At that point, central banks in major countries will face an even more complex economic environment, and policy will fall into an even deeper dilemma.

Four years ago, the misjudgment of the “temporary inflation theory” still stands out clearly. Global central banks are again at a crossroads. This time, can decision-makers around the world go beyond historical inertia and find the only narrow path left to achieve a soft economic landing on the brink of stagflation? The challenge has already arrived.

(Editor: Wen Jing)

Keywords:

                                                            Inflation