In high-income countries, consumer price inflation is running at rates not seen in four decades. With inflation no longer low, neither are interest rates. The era of “l(fā)ow for long” is over, at least for now. So, why did this happen? Will it be a lasting change? What should the policy response be?

Over the past two decades, the Bank for International Settlements has provided a different perspective from those of most other international organisations and leading central banks. In particular, it has stressed the dangers of ultra-easy monetary policy, high debt and financial fragility. I have agreed with some parts of this analysis and disagreed with others. But its Cassandra-like stance has always been worth considering. This time, too, its Annual Economic Report provides a valuable analysis of the macroeconomic environment.

The report summarises recent experience as “high inflation, surprising resilience in economic activity and the first signs of serious stress in the financial system”. It notes the widely held view that inflation will melt away. Against this, it points out that the proportion of items in the consumption basket with annual price rises of more than 5 per cent has reached over 60 per cent in high-income countries. It notes, too, that real wages have fallen substantially in this inflation episode. “It would be unreasonable to expect that wage earners would not try to catch up, not least since labour markets remain very tight,” it asserts. Workers could recoup some of these losses, without keeping inflation up, provided profits were squeezed. In today’s resilient economies, however, a distributional struggle seems far more likely.