Financial TimesFinancial Times

Lessons from the great reflation

By Martin Wolf

07 Feb 2023 · 4 min read

Editor's Note

Central bankers could learn lessons from the 1970s when it comes to inflation, Martin Wolf writes in the FT. They should avoid the mistake of lowering interest rates too quickly—and too drastically.

What can we learn from monetarists about what happened to prices after the Covid-19 pandemic struck? What can we learn from the mistakes made in the 1970s? The purpose of posing these questions is to inject humility into current debates, especially among central bankers. Their failure to forecast, or prevent, the big jumps in price levels of recent years is significant. So, why did it happen and what might history suggest about the mistakes still to come?

It is possible to argue that there is nothing to learn. Covid-19 was, it might be suggested, a unique event to which policymakers responded in the most sensible possible way. Similarly, the 1970s are ancient history. Our policymakers would not make the mistake of letting inflation shoot up again, so embedding expectations of permanently high inflation. I would like to believe these propositions. But I do not.

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