The writer, an FT contributing editor, is a former chief economist at the Bank of England
This week, the ECB became the first major central bank to raise interest rates to counter the inflationary threat from surging energy costs arising from the Middle East crisis. Next week, the searchlight shifts to key interest rates decisions on either side of the Atlantic. This seems likely to divide opinion at the Federal Reserve and the Bank of England, with decisions hinging on judgments about the degree of inflation persistence the shock is likely to impart.
Central banks still bear the scars of the last energy shock following the start of the Russia-Ukraine war in 2022. Back then, they underestimated the likely degree of inflation persistence, resulting in interest rates being raised too late. As inflation rose, companies and workers adjusted price and wage expectations upwards — so-called “second-round” effects — adding to momentum. An inflationary python was let loose.