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. This week, about 20 central banks worldwide will hold monetary policy meetings, covering nearly two-thirds of the global economy. Among the G10 central banks, eight will be making rate decisions this week. 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 some 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, ECB, and Bank of England are all 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 their 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, a “data-dependent” approach has become common among major central banks. It is expected that most will keep rates unchanged this week, but their policy guidance will likely turn hawkish to prepare for possible tightening later.

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 bolster market confidence in its inflation target, possibly raising rates once this year. The Bank of Japan is expected to maintain current rates, 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 surges is Iran’s blockade of the Strait of Hormuz, with future shipping expectations depending on the evolving geopolitical game among the U.S., Iran, and Israel. The enormous geopolitical uncertainty, with the Strait’s closure duration as a transmission tool, makes the trajectory of global inflation even harder to predict. Dong noted that since the conflict only started half a month ago, the actual inflation impact has yet to fully manifest. For major central banks, maintaining a “wait-and-see” stance until clearer inflation data emerges is a rational choice, adopting a “data-dependent” approach.

Regarding the Fed, ECB, and Bank of Japan, each faces different situations.

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 soft February employment data needs further observation to determine if it signals a trend change, while also acknowledging the inflation risks from rising oil prices. 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 2022 energy crisis triggered by the Russia-Ukraine conflict, the ECB’s signals are expected to be more hawkish than the Fed’s in response to Middle East tensions. If energy prices stay high, the ECB may further tighten its stance to address 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 160 against the dollar and the risk of runaway inflation from imported costs suggest a need for hawkish rate hikes to stabilize the currency. On the other hand, aggressive rate 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 this inflation is a “temporary supply shock” and rely on government fiscal measures rather than monetary policy to offset energy costs, while warning against excessive yen depreciation.

Divergence among major central banks

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

Wu Qidi noted 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; and the unemployment rate remains low.

However, internal debates within the RBA are evident. The rate hike was narrowly approved 5-4, revealing deep divisions over economic outlook. Doves worry that excessive tightening 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 Australia’s early rate hikes stem from its unique economic situation—unlike other major economies that see demand slowdown after prolonged tightening, 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.

Market expectations are that the RBA will continue raising rates, while the BOJ and ECB may also hike this year. The Fed, however, is unlikely to raise rates further. This divergence highlights the complex, multi-dimensional outlook for global monetary policy.

Australia’s case underscores that the current global central bank landscape is characterized by multi-faceted divergence rather than a simple hawkish vs. dovish dichotomy.

Dong emphasizes that for the Fed, without the economic resilience of Australia or the urgency of the ECB to combat imported inflation, it remains in a dilemma—caught between inflation risks and recession fears—leading to a pause in rate hikes and a “data-watching” stance.

The ECB faces a different challenge: its economic outlook is weaker than the U.S., but it faces more direct energy shocks. If it is forced to hike amid weak growth due to imported inflation, it risks falling into a stagflation trap similar to 2022, but with a worse demand backdrop.

The BOJ’s situation is the most fragmented. Yen depreciation to 160 exacerbates imported inflation, suggesting a need for rate hikes, but high government debt constrains aggressive tightening, risking fiscal crises. The BOJ thus faces a dilemma of balancing currency stability and fiscal sustainability.

Fundamentally, Dong argues that the core reason for this divergence among central banks is that each country’s economy is at a different stage in the demand cycle when responding to the same geopolitical shocks.

Behind this policy divergence are 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 and faces increased pressure to hike rates to curb inflation. The Fed is caught between signs of stagflation—raising rates risks worsening employment—so it remains cautious, awaiting more data. Japan’s situation is dominated by rising energy prices and yen weakness, with rate hikes aimed at normalizing policy and easing currency depreciation.

Will the 2022 inflation nightmare return?

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

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

However, there are significant differences in the global economic context. Dong points out that demand conditions differ: in 2022, the world was already overheating post-pandemic, with supply shocks amplifying inflation. Currently, global demand is not overheated but relatively weak, which suppresses the transmission of supply shocks to inflation. Policy space also differs: in 2022, despite painful rate hikes, central banks still had room to tighten aggressively to fight inflation. Now, after multiple rate cuts, major economies are not in an overheated demand state, leaving less room for further hikes. Additionally, policy coordination has shifted from unity to divergence: in 2022, high inflation led to a consensus on rate hikes, but now, differences in economic cycles and external environments have caused policy divergence.

Therefore, Dong believes the probability of a 2022-style inflation nightmare repeating is low. The more likely scenario is that major economies are stuck in a stagflation trap of wanting to hike but being unable to. However, if the Strait of Hormuz blockade extends significantly or geopolitical tensions escalate, it could still trigger unexpected inflation shocks—an important tail risk to monitor.

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 the CPI basket has decreased. The energy transition has also reduced oil price elasticity. Past experiences in 2022 have made central banks, especially the ECB, highly alert to inflation driven by energy shocks, 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” four years ago is still vivid. As the global central banks face a crossroads again, can policymakers break free from past inertia and find a narrow path for a soft landing amid stagflation? The challenge is already here.

(Edited by: Wen Jing)

Keywords: Inflation