Equities, bonds, long-dated index-linked gilts, credit, crypto — the list of market horror stories in 2022 is extensive. Yet the biggest casualty this year was surely the reputation of big central banks.In the period since the onset of the coronavirus pandemic and Russia’s invasion of Ukraine, their inflation forecasting has been dismally off-beam. Their response to the rapidly rising price level was slow and, in the notable case of the US Federal Reserve, initially timorous.

Central banking conventional wisdom held that it was necessary to “look through” supply-side shocks such as oil and gas price increases and closures of ports and semiconductor plants because their impact on potential output was transitory.

Yet it is clear that the supply shocks and inflation arising from factors such as deglobalisation will bring about a lasting reduction in potential output. In such circumstances, it is the job of monetary policymakers to tighten so demand is brought in to line with reduced productive capacity. One of the lessons of the cost-push inflation of the 1970s after the first oil price rise was that supply-side shocks can also, in central banker jargon, de-anchor inflation expectations and produce second-round effects in labour markets.