The Spanish-American philosopher George Santayana famously warned that "those who cannot remember the past are condemned to repeat it". But sometimes even those who can recall the past have a selective memory and draw the wrong conclusions. This is how the global policy response to the current bout of inflation is playing out, with governments and central banks across the developed world insisting that the only way to tame soaring prices is by raising interest rates and tightening monetary policy.
The Volcker shock of 1979, when the US Federal Reserve, under then-chair Paul Volcker, sharply increased interest rates in response to runaway inflation, set the template for today's monetary tightening. Volcker's rate hikes were intended to combat a wage-price spiral by raising unemployment, thereby reducing workers' bargaining power and depressing inflationary expectations. But the high interest rates triggered the largest decline in US economic activity since the Great Depression, and the recovery took half a decade.
But the context for this heavy-handed approach was very different from current conditions because wage increases are not the main driver of inflationary pressures. Even some of the most vocal champions of tight money and rapid interest-rate hikes recognise this strategy will most likely trigger a recession and significantly damage the lives and livelihoods of millions in their own countries and elsewhere.
