Global Central Banks at a Crossroads: Will the 2022 Inflation Nightmare Return?

Source: 21st Century Business Herald Author: Wu Bin

In 2022, the supply gloom brought by the COVID-19 pandemic had not yet dissipated, when the Russia-Ukraine conflict suddenly erupted, and inflation shocks were still fresh in memory. Although price increases in major economies reached double digits at the time, institutions like the Federal Reserve and the European Central Bank once confidently believed in a “transient inflation” theory. Their delayed responses ultimately led to persistent high inflation, drawing widespread criticism of their policies.

Four years later, a similar scene is unfolding again. The Iran-U.S. conflict has caused oil prices to surge past $100, igniting a new inflation storm. About 20 central banks worldwide will hold monetary policy meetings this week, covering nearly two-thirds of the global economy. Among the G10 central banks, eight will be making rate decisions. With the Iran-U.S. conflict posing a fresh inflation threat, many central banks may be forced to delay rate cuts or even consider raising interest rates in certain cases.

However, policy adjustments are not imminent at this moment. Besides the Reserve Bank of Australia, which is expected to raise rates again, the Federal Reserve, the European Central Bank, and the Bank of England are likely to keep rates steady while assessing how soaring energy costs will impact consumer prices and economic growth. Future monetary policy will largely depend on how long the Middle East conflict persists. If the situation again pushes up prices, hampers economic growth, or causes sharp currency fluctuations, central banks are prepared to intervene at any time.

Will the 2022 inflation nightmare repeat itself this time? Will global central banks make the same mistakes again?

The Iran-U.S. conflict ignites a new inflation puzzle

Amid rising oil prices, the Federal Reserve, ECB, and Bank of Japan are set to announce rate decisions this week, with investors closely watching for key signals.

Wu Qidi, director of the Xunda Information Securities Research Institute, told the 21st Century Business Herald that under the backdrop of rising oil prices driven by the Iran-U.S. conflict, central banks face a dilemma between controlling inflation and maintaining growth. Currently, “data dependency” has become the common approach among major central banks. It is highly likely that they will keep rates unchanged this week, but collectively adopt a “hawkish” stance to prepare for potential tightening.

Market expectations are that the Fed will hold rates steady, but the outlook for rate cuts has shifted significantly. The dot plot may show only one rate cut this year, with officials assessing the risk of stagflation. The ECB is also likely to keep rates unchanged but may signal a hawkish stance to maintain market confidence in its inflation target, possibly raising rates once this year. The Bank of Japan is expected to keep rates steady, but rising energy prices and imported inflation could accelerate its future rate hikes.

Dong Zhongyun, chief economist at AVIC Securities, analyzed that the ongoing Iran-U.S. conflict has driven a sharp surge in global oil prices and expectations. Brent crude has already broken through $100 per barrel, with futures remaining above that level, compared to just $63 at the end of last year. The rapid increase in oil prices injects significant uncertainty into the already slowing global inflation trend.

More critically, the direct trigger for this round of oil price surge is Iran’s blockade of the Strait of Hormuz, with future shipping expectations depending on the geopolitical developments among the U.S., Iran, and Israel. The enormous geopolitical uncertainty, with the Strait’s closure duration as a transmission tool, makes the evolution of global inflation even harder to predict. Dong noted that since the conflict has only been ongoing for about half a month, the actual inflation impact has yet to fully manifest. For major central banks, maintaining a “wait-and-see” approach until clearer inflation data emerges is a rational choice, adopting a “data dependency” model.

Regarding the Fed, ECB, and BOJ, their situations differ:

For the Fed, Dong emphasizes that weak labor market data combined with rising oil prices make it difficult to achieve both inflation control and economic stability simultaneously. The key message this week will likely be extreme policy patience and a rebalancing of dual objectives. Powell may stress that the weak February non-farm payroll data requires further observation to determine if it signals a trend, while the inflation risk from rising oil prices cannot be ignored. This stance, which considers both employment and inflation data, suggests that market expectations for rate cuts should be postponed. The Fed is also likely to signal that it is not considering rate hikes now or in the near future, trying to balance hawkish inflation concerns with dovish employment worries.

For the ECB, given its higher dependence on external energy and the fresh memory of the energy crisis triggered by the 2022 Russia-Ukraine conflict, signals are expected to be more hawkish than the Fed’s. If energy prices remain high, the ECB may further tighten its stance to counter inflation risks and keep policy options open.

For the Bank of Japan, rising oil prices pose a classic stagflation shock—higher import costs push up imported inflation, but soaring energy costs also damage economic growth and corporate profits. Dong predicts that the BOJ’s signals will be the most cautious and contradictory. On one hand, the yen’s sharp depreciation to around 160 could justify a hawkish rate hike to stabilize the exchange rate; on the other hand, aggressive hikes could trigger a fiscal crisis given Japan’s high government debt, and would not solve supply-side energy shortages. The BOJ is expected to emphasize that current inflation is a “temporary supply shock” and rely on government fiscal subsidies rather than monetary policy to offset energy costs, while warning the forex market against excessive yen depreciation.

Central banks seek different paths amid divergence

The Reserve Bank of Australia became the first major developed market central bank to raise rates this year on February 17, leading Japan’s BOJ. On March 17, the RBA announced a 25 basis point hike to 4.10%, marking its second consecutive rate increase this year.

Wu Qidi told reporters that the RBA’s decision reflects the resilience of the Australian economy. Q4 2025 GDP grew by 2.6% year-on-year, exceeding the 2% potential growth rate; January CPI rose 3.8% YoY, above the 2-3% target range. The labor market remains tight.

However, internal debates within the RBA are evident. The decision was narrowly passed 5-4, revealing deep divisions over economic outlook. Doves worry that excessive rate hikes could dampen already fragile consumption and growth. This suggests future rate hikes will be highly data-dependent, with possible policy swings based on incoming data.

Dong believes that Australia’s early rate hikes stem from its unique economic situation—unlike other major economies, which show demand slowdown after successive hikes, Australia’s economy remains resilient. Its inflation is driven more by domestic corporate investment and a robust labor market than by imported energy prices. Therefore, the RBA’s rate hikes are driven by the need to address domestic inflation, with Middle East geopolitical events merely exacerbating this necessity rather than being the primary cause.

Markets expect the RBA to continue raising rates, while the BOJ and ECB may also hike this year. The Fed, however, is unlikely to raise rates further, leading to a stark divergence in monetary policy outlooks.

Australia’s case highlights the current multi-dimensional divergence among global central banks, rather than a simple hawkish-pessimistic split.

Dong notes that for the Fed, lacking Australia’s economic resilience or the ECB’s urgency to combat imported inflation, it finds itself in a dilemma of “pause”—neither cutting nor hiking—becoming a typical “data-dependent” central bank.

For the ECB, although its economic outlook is weaker than the U.S., it faces more direct energy shocks. If it is forced to hike during a slowdown due to imported inflation, it would resemble a stagflation scenario similar to 2022, but with a weaker demand foundation.

For the BOJ, the situation is most fragmented. Yen’s depreciation to 160 intensifies imported inflation, which theoretically calls for rate hikes, but high government debt constrains aggressive tightening, risking fiscal crises. The BOJ’s policy will likely face a dilemma between defending the exchange rate and fiscal stability.

Fundamentally, Dong emphasizes that the core reason for this divergence among central banks lies in their different economic positions in response to the same geopolitical shock.

Divergence in monetary policy reflects structural differences. Wu notes that the divergence stems from varying inflation pressures and growth drivers across economies. The Eurozone, as a net energy importer, is highly sensitive to oil shocks, increasing ECB’s rate hike pressure to curb inflation. The Fed faces a “stagflation” dilemma—raising rates risks killing jobs, while cutting risks inflation—thus it remains cautious, awaiting more data. The BOJ is mainly constrained by rising energy prices and yen weakness, with rate hikes aimed at normalizing policy and easing currency depreciation.

Will the 2022 inflation nightmare recur?

In 2022, the Russia-Ukraine conflict caused major economies’ prices to surge into double digits. If the Iran-U.S. conflict persists longer, will the inflation nightmare of 2022 reappear?

Comparing the two, Dong sees similarities: both occur near critical turning points in monetary policy cycles—2022 at the start of tightening, now in the middle of easing; both are driven by energy supply shocks directly boosting inflation expectations.

However, the global economic contexts differ significantly. Dong explains that first, the demand environment differs. In 2022, the Russia-Ukraine conflict hit a global economy already overheating post-pandemic, with supply shocks amplifying inflation. Currently, global demand is not overheating but relatively weak, which suppresses supply-driven inflation transmission. Second, policy space varies. Despite painful rate hikes in 2022, central banks still had room to tighten further to curb inflation. Now, after multiple rate cuts, major economies are not in an overheated demand state, limiting further hikes. Third, policy coordination has shifted from unity to divergence. In 2022, high inflation led to a consensus on rate hikes; now, differences in economic cycles and external conditions have caused divergence.

Thus, Dong believes the probability of a 2022-style inflation nightmare repeating is low. More likely, major economies will be stuck in a stagflation-like “want to hike but cannot” scenario. However, if the Strait of Hormuz blockade extends significantly or geopolitical tensions escalate, it could trigger unexpected inflation shocks—an important tail risk.

Wu Qidi also notes that compared to 2022, the macro environment has fundamentally changed, making a repeat of the inflation nightmare less likely.

The initial inflation environment was very different. Before 2022, pandemic-related supply chain disruptions and large U.S. fiscal stimulus pushed inflation to 40-year highs. Currently, U.S. CPI growth has been on a downward trend since late 2025, with a very different starting point.

Energy’s role in inflation has also declined. Over recent years, service sector inflation has increased, and energy’s weight in CPI has decreased. The energy transition has also reduced oil price elasticity. Past experiences have made central banks, especially the ECB, highly alert to energy-driven inflation, which will influence market expectations and policy actions.

Looking ahead, Wu warns that the key variable is the duration and intensity of the Iran-U.S. conflict. If it leads to a long-term blockade of the Strait of Hormuz, it could cause a severe energy supply crisis, raising inflation and constraining growth simultaneously. In such a scenario, central banks will face a more complex environment and difficult policy choices.

The misjudgment of “transient inflation” in 2018-2022 remains vivid. As the world once again faces a crossroads, can policymakers transcend past inertia and find a narrow path for a soft landing amid stagflation? The challenge is already here.

(Edited by: Wen Jing)

Keywords: Inflation