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 are still fresh in memory. Although major economies experienced double-digit price increases 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 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 certain cases.

However, policy adjustments are not yet urgent. 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 Sparks 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 SourceDa Information Securities Research Institute, told 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 the common choice 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, as officials assess 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 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 geopolitical uncertainty, using the duration of the Strait blockade as a transmission channel, 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” stance until clearer inflation data emerges is a rational choice, adopting a data-dependent approach.

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 patience and a rebalancing of dual objectives. Powell may stress that the weak February non-farm payrolls require further observation to determine if it’s a trend, while the rising oil prices pose inflation risks. This signals a delay in rate cuts, with the Fed possibly refraining from rate hikes for now, trying to balance hawkish inflation concerns with dovish employment worries.

For the ECB, given its higher dependence on external energy and the recent memory of the 2022 energy crisis triggered by the Russia-Ukraine conflict, signals are expected to be more hawkish. If energy prices stay high, the ECB may further tighten its stance to address inflation risks and keep policy tightening options open.

For the Bank of Japan, rising oil prices pose a classic stagflation challenge—higher import costs push up inflation, but simultaneously harm economic growth and corporate profits. Dong predicts that the BOJ’s signals will be the most cautious and contradictory. While a sharp yen depreciation to 160 could theoretically warrant rate hikes to stabilize the currency, the high government debt makes aggressive tightening risky, potentially triggering a fiscal crisis. The BOJ is likely to emphasize that current 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, ahead of Japan. On March 17, it announced a 25 basis point increase to 4.10%, marking its second consecutive rate hike this year.

Wu Qidi noted that Australia’s economy shows strong resilience. 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 reveal divisions. The decision to raise rates narrowly passed 5-4, indicating deep disagreements over the economic outlook. Doves worry that further 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 experiencing demand slowdown after multiple hikes, Australia’s economy remains resilient. Its inflation is driven more by domestic demand, business investment, and a robust labor market, rather than solely by imported energy prices. Therefore, the RBA’s rate hikes are driven by the need to address domestic inflation, with Middle East geopolitical events 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, but the Fed is unlikely to do so. This highlights a significant divergence in monetary policy outlooks among major central banks.

Australia’s case underscores the current global divergence in monetary policy, rather than a simple hawkish vs. dovish dichotomy.

Dong emphasizes that for the Fed, without Australia’s economic resilience or the ECB’s urgency to combat imported inflation, it remains in a dilemma—either pause rate hikes or risk fueling inflation, effectively caught in a “data-dependent” 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 a stagflation scenario similar to 2022, but with a worse demand backdrop.

The BOJ’s situation is the most fragmented. While yen depreciation to 160 suggests a need for rate hikes to stabilize the currency, high government debt constrains aggressive tightening, risking a fiscal crisis. The BOJ must balance currency stabilization with fiscal sustainability.

Fundamentally, Dong argues that the core reason for this divergence among central banks lies in their different economic stages and demand cycles in response to the same geopolitical shocks.

Behind the policy divergence is also structural differences. Wu notes that the current 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 pressure to hike rates to curb inflation. The Fed faces a “stagflation” dilemma—raising rates risks inflation, cutting rates risks employment—thus it remains cautious, awaiting more data. Japan’s situation is dominated by rising energy costs 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’ inflation to reach double digits. If the Iran-U.S. conflict persists longer, will the inflation nightmare of 2022 reoccur?

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 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 overheating post-pandemic, with supply shocks amplifying inflation. Currently, global demand is not overheated but relatively weak, which suppresses inflation transmission. Policy space also differs: in 2022, despite painful hikes, central banks still had room to tighten aggressively; now, many have already cut rates multiple times and are less able to hike further. Additionally, policy coordination has shifted from unity to divergence—2022 saw a consensus on rate hikes to fight inflation, while now, countries’ policies vary due to different economic cycles and external environments.

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, a tail risk worth monitoring.

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 stimuli 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 diminished. 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 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 trigger 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 world faces a crossroads again, can policymakers break free from past inertia and find a narrow path to a soft landing amid stagflation? The challenge is already here.

(Edited by: Wen Jing)

Keywords: Inflation