The mandate of the world’s major central banks is to maintain price stability, which means that monetary policymakers need to identify the sources of inflation and anticipate its trajectory. Central bankers undoubtedly missed the mark by initially dismissing the sharp increase in inflation in 2021 as “transitory,” as Powell once did. But other institutions also made the same mistake. The International Monetary Fund (IMF), for example, likewise failed to anticipate the pickup and durability of inflation. Its macroeconomic forecasts for the United States were similar to the Fed’s projections.
In his Jackson Hole speech in August, US Federal Reserve Chair Jerome Powell made clear that curbing inflation is the Fed’s top priority. While the Fed has distanced itself from its assessment last year that the inflation pickup would be short-lived, the grounds for that assessment were tenuous even when made, given the many uncertainties about the drivers of inflation at the time.
One such driver, in particular, rising shipping costs, has been under-studied, despite being an important contributor to — and predictor of — inflation. Even last year, the surge in shipping costs was a canary in the coal mine pointing to the need for higher interest rates to counter building price pressures.
