The author is a Vice Chairman of BlackRock and former Chairman of the Board of Directors of the Swiss National Bank

Post-pandemic inflation in major advanced economies has reached levels we haven’t experienced in two generations. Unsurprisingly, this has led to widespread calls for central banks to aggressively tighten monetary policy.Financial markets have quickly repriced their monetary policy outlook, and markets now expect At least seven rate hikes before the end of 2023.

debate about How to ‘temporarily’ inflation You will end up missing the point. The root cause of this rise is more important.

Unlike at any time in the past 40 years, the post-pandemic inflation surge has not been driven primarily by excess demand but by supply capacity constraints, most recently Research Shown by BlackRock Investment Institute.

Think of inflation as the noise of the economic engine. In the past, it was caused by the engine revs too fast. This is largely a result of supply constraints causing persistent engine misfires today and for the foreseeable future.

This misfire occurs on two levels: First, there are economic-wide constraints. Getting supply capacity back to normal is proving harder than restarting demand when activity is restarted after lockdown. More important is the second mistake: supply capacity is misplaced.

The pandemic has caused consumer spending to suddenly shift from services to goods. Capabilities – human and capital – cannot be expected to switch sectors so quickly. result? As supply struggles to keep pace, there are bottlenecks in the commodity production sector, but idle capacity in the service sector. Restrictions on the supply of commodities have sparked price increases, and while prices may fall in suffering industries, they are usually more sticky during the decline. This will push up inflation even if the broader economy has yet to fully recover.

U.S. economy in trouble It is this dynamic. The Covid-19 shock and subsequent economic reopening brought greater supply constraints than in decades. Inflation has risen to its highest level since 1982. However, the economy is nowhere near the overall heat or even its estimated level of potential output and employment.

So we find ourselves in a completely different situation Paul Walker The problem he faced when he became Fed chairman in 1979.At the time, the economy was running hot, and the goal was to push inflation that was already entrenched. outside the system.

But this wasn’t Volcker’s moment. The old playbook does not apply: Today, we are in an era of severely constrained supply, even if the economy is below its potential. This changes everything from a macro perspective.

When inflation is driven by demand, sensible policies can, in principle, stabilize inflation and growth. This is impossible in a world where inflation is the result of supply constraints. Increased macro volatility has become inevitable. Central banks will either accept higher inflation or be prepared to destroy demand across the economy to ease supply constraints in some of them.

The long-term historical relationship between unemployment and inflation suggests that if the central bank tries to keep inflation close to its 2% target amid supply constraints in this restart, it would mean doubling unemployment. digit level.

To minimize volatility in growth, central banks rightly want to endure supply-driven inflation while longer-term inflation expectations remain stable. In fact, recent research suggests that they shouldn’t be trying to squeeze inflation caused by changes in demand at all. Inflation helps smooth adjustments to major shifts in demand patterns.

Needless to say, central banks should ease this year by unwinding their extremely accommodative monetary policy stance and returning interest rates to a more neutral environment. Recovery of activity – unlike normal recovery – does not require maintenance stimulation. But what they should not be doing at this time is slamming the policy brakes and sabotaging activities.

This is why the current monetary policy response to high inflation is more dovish than in the past. Despite the current excitement about the accelerated pace of policy normalization, it likely will remain so. The best way now is not to destroy jobs and growth with monetary policy, but to allow the economy to reopen as public health concerns ease and normalize spending mixes. This would ease today’s severe inflationary pressures.