The Switch From Stability to Turmoil
Since the 1990s, central banks have used inflation targeting, setting a clear inflation goal (often around 2%) and adjusting inflation rates to maintain it. This framework bought a level of credibility and predictability that helped anchor inflation expectations and supported economic planning.
Before COVID-19, the system appeared resilient. Inflation remained stable, interest rates stayed predictable, and recessions tended to be manageable. But underlying vulnerabilities became exposed when the global pandemic rocked supply chains and renewed geopolitical instability.
Post-Pandemic Challenges
The pandemic-era inflation spike was driven not by overheating demand but supply-side disruptions. In response, the Fed and peers raised rates sharply in 2022-23. Yet critics argue these hikes risked stifling economic recovery, worsening inequality, and ignoring structural issues like wages and housing.
This critique echoes a 2025 VoxEU-CEPR article calling for a broader remit beyond inflation. The authors argued that central banks must now juggle employment, financial stability, and inequality rather than just price levels. The article also explores the fact that in our post-pandemic environment inflation has proven more resilient to rate hikes than expected. This may be partly because a large share of inflation in recent years has been supply-driven not demand-driven rendering the traditional model increasingly unproductive.
Additionally, the labor market has evolved. Workers now have more bargaining power, and shifts like remote work and early retirements have changed wage dynamics. These trends make it harder to predict how wage growth might feed into inflation, especially when standard metrics no longer fully capture participation or productivity.
At the same time, global events like the Ukraine war, trade tensions, and climate-related disruptions have made inflation more volatile and increasingly globally linked. In this context, narrow domestic inflation targets may seem outdated or even harmful. As the VoxEU article suggests, inflation targeting could tie central banks’ hands, forcing them to prioritize inflation control over broader economic stability.
Alternatives to Inflation Targeting
Given evolving challenges, several alternative frameworks are gaining traction:
- Dual or Triple Mandates:
Proposals call for equal weight on inflation, employment, and financial stability, even considering environmental metrics. This enables central banks to adapt policy responses to complex conditions.
- Nominal GDP targeting:
Rather than focusing exclusively on inflation, this approach stabilizes overall spending and growth, allowing room for mild inflation when real output contracts.
- Enhanced Coordination with Fiscal Policy:
Especially during supply shocks, monetary policy may be limited in effectiveness unless complemented by fiscal measures aimed at production and investment.
Critics caution these alternatives diluting clarity and credibility. Inflation targeting’s strength lies in its simplicity and transparency. Relaxing it could invite greater political interference and make accountability murkier.
Choosing Evolution over Disruption
The debate doesn’t demand abandoning inflation targeting wholesale, it requires thoughtful adaptation. Central banks may need to retain inflation as an anchor, but with flexible tools and broader policy alignment during unusual economic shocks.
Institutional credibility remains vital. Central bank independence underpins confidence and shouldn’t mean inflexible policy in the face of global disruptions. A calibrated evolution might preserve credibility while enhancing responsiveness.
Moving Forward
The effectiveness of inflation targeting is not inherently dismissed, but its limitations are increasingly visible. The COVID eara revealed that inflation can stem from supply side shocks, not just demand, and political pressure demonstrates dissatisfaction with narrow mandates.
As monetary policy navigates new terrain, central banks may need to broaden mandates to remain relevant. Whether it’s via nominal GDP frameworks, expanded mandates that include employment or sustainability, or tighter coordination with fiscal authorities, the next era of central banking must be adaptive—but also retain the trust and clarity that made inflation targeting so effective.