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

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 remain fresh in memory. Although major economies experienced double-digit price increases at the time, the Federal Reserve, European Central Bank, and other institutions once confidently maintained a “transient inflation” stance. 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, and a new inflation storm is brewing. 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 announce their decisions this week. With the renewed inflation threat from the Iran-U.S. conflict, many central banks may be forced to delay rate cuts or even consider rate hikes in some 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 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? 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, Bank of Japan, and others 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 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 dependence” has become a common approach 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 rate cut outlook 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 market expects the Bank of Japan to maintain current rates, though 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 rise in global oil prices and expectations. Brent crude has surpassed $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.

The key 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 tool, makes the evolution of global inflation even harder to predict. Dong Zhongyun noted that since the conflict has only been ongoing for about two weeks, 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 relatively rational choice.

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

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 main signal this week will likely be extreme policy patience and a rebalancing of dual objectives. Powell may stress that the soft February non-farm payroll data requires further observation to determine if it signals a trend, while rising oil prices pose inflation risks. This stance, which considers both employment and inflation data, suggests that market expectations for rate cuts will be pushed back. The Fed is also likely to indicate that it is not considering 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 fresh memory of the 2022 energy crisis triggered by the Russia-Ukraine conflict, signals are expected to be more hawkish than the Fed’s. If energy prices stay high, the ECB may further tighten its stance on inflation risks and keep policy options open for future tightening.

As 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 believes the BOJ’s signals will be the most cautious and conflicted. 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 hikes could trigger a fiscal crisis given Japan’s high government debt, and rate hikes won’t solve supply-side energy shortages. The BOJ is expected to remain cautious, emphasizing that current inflation is a “temporary supply shock” and relying on government fiscal subsidies rather than monetary policy to offset energy costs, while warning against excessive yen depreciation.

Central banks seek their own paths amid divergence

The Reserve Bank of Australia became the first major developed market bank to raise rates this year on March 17, increasing the benchmark rate by 25 basis points to 4.10%, marking its second consecutive rate hike this year.

Wu notes that the decision to hike reflects Australia’s resilient economy. Q4 2025 GDP grew 2.6 year-over-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 debate within the RBA was evident, as the decision passed narrowly 5-4, revealing deep divisions over the 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 emphasizes that Australia’s early rate hikes stem from its unique economic situation—unlike other major economies experiencing demand slowdown after prolonged tightening, Australia’s economy remains notably resilient. Its inflation is driven more by domestic demand, corporate investment, and a buoyant 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 do so, highlighting a clear divergence in monetary policy outlooks.

Australia’s case underscores the current global divergence in central bank policies, rather than a simple hawkish versus dovish split.

Dong notes that for the Fed, without Australia’s economic resilience or the ECB’s urgency to combat imported inflation, it finds itself in a dilemma—either pause rate hikes or risk fueling inflation, caught between inflation risks and recession fears. It is essentially in a “data-dependent” stance.

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 backdrop.

The BOJ faces the most fractured situation. While yen depreciation to 160 suggests a need for rate hikes to stabilize the currency, Japan’s high government debt constrains aggressive tightening, risking fiscal instability. Its monetary policy faces a dilemma of maintaining exchange rate stability versus fiscal sustainability.

Fundamentally, Dong emphasizes that the core reason for this divergence among central banks lies in the different stages of economic cycles and structural differences in their economies’ responses to the same geopolitical shocks.

Will the 2022 inflation nightmare return?

In 2022, the Russia-Ukraine conflict caused double-digit inflation in major economies. If the Iran-U.S. conflict persists longer, will the inflation nightmare of 2022 reemerge?

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 global inflation expectations.

However, there are significant differences in the global economic context. Dong points out that demand conditions differ markedly. In 2022, the Russia-Ukraine conflict hit when the world was already experiencing overheating demand and high inflation post-pandemic, with supply shocks amplifying inflation. Currently, global demand is not overheated but relatively weak, which suppresses the transmission of supply-side inflation.

Policy space also varies. Despite painful rate hikes in 2022, central banks still had room to tighten further to curb inflation. Now, many have already cut rates multiple times and are not in an overheated demand environment, limiting further hikes.

Finally, policy coordination has shifted from unity to divergence. In 2022, high inflation led to a consensus on rate hikes, but now, due to differing economic cycles and external conditions, central banks’ policies are diverging.

Dong concludes that the probability of a repeat of the 2022-style inflation nightmare is relatively 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 trigger unexpected inflation shocks—an tail risk worth monitoring.

Wu also believes that compared to 2022’s Russia-Ukraine conflict, the macro environment has fundamentally changed, making a repeat of the inflation nightmare less likely.

The initial inflation environment was vastly different. Before 2022, pandemic-related supply chain disruptions and large 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 CPI has decreased. The energy transition has also reduced oil price elasticity. Past experiences have heightened central banks’ vigilance against 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. A prolonged Strait blockade could lead to 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. This time, global policymakers are at a crossroads. Can they break free from past inertia and find a narrow path to a soft landing amid stagflation? The challenge is already here.