
Inflation running much higher than central banks expected previously is causing them to rethink the appropriate monetary policy response to tame inflation. Most, including the RBA, are admitting that demand growth is running faster than growth in supply of goods and services and with little chance of materially lifting supply near-term because of continuing supply chain problems made worse by the Ukraine War and China’s Omicron lockdowns, slowing growth in demand towards growth in supply is the only way to cap inflation and bring it back down close to inflation targets. Using blunt-edged monetary policy to batten down demand growth is high risk and could easily go too far. Recession risk is rising.