The Cost-of-Living Crisis: Having gotten it wrong in one direction, the central banks will get it wrong again in the other.

• Author: Connolly, Bernard

The cost-of-living crisis, as it has been labeled, has replaced Covid at the top of the list of domestic political worries in Western countries. But if Covid was an exogenous shock to those countries, inflation, or a good part of it, has not been. In the United States in particular, domestic politics sowed the seeds of inflation. The Georgia run-off Senate election in January 2021 changed everything--and notably the bond market--by giving U.S. President Joe Biden the opportunity to get his hubristic spending plans through Congress. Even the most distinguished (other than to the Nobel Committee) Democratic economist Larry Summers could see, and shouted loudly, that pouring unprecedented fiscal stimulus into an economy in which demand was recovering strongly after the most draconian restrictions were eased, yet supply chains remained disrupted globally, could have only one outcome: a wildly overheated economy and surging inflation. Summers was right, of course, and those politicians and economists who now vilify him are simply showing how right Rose Friedman was when she said that one could almost always predict an economist's analytical views simply by knowing his political affiliation. Summers, by being an exception to that rule, deserves considerable credit.

If Summers deserves credit, the Fed, and central banks more generally, do not. Were political factors to blame? They always are, of course, in the case of the European Central Bank -- that goes without saying. In the United States, former Fed Chair Janet Yellen certainly did not enhance her reputation by shutting her eyes, as Treasury Secretary, to the evident truth about her boss's fiscal plans. But what about her successor? Some might wonder if current Fed Chair Jay Powell was constrained in 2021 by a desire to be re-appointed. For sure, his rhetoric, and perhaps his supposed "style"--a reluctance to make big moves--changed markedly after his re-nomination.

However, the simplest explanation of the Fed's "hawkish" tilt this year is that in the face of public anger about inflation, it could no longer sustain the ridiculous, wokeish stance that it had formally adopted in August 2020. That still leaves the question of how central banks failed, or refused, to recognize that continuing to pump money into asset markets--even after the threat of Keynesian recession, which had been real in much of 2020, had been dispelled--would produce inflation.

In the case of the Fed, the best answer is...