This is not to say that individual central bankers are untrustworthy. The problem is that most central banks are not as independent as many people think. In a global environment of political polarization, heavy government debt burdens, geopolitical tension, and increased de-globalization, central banks' autonomy cannot be absolute. As non-elected technocrats, central bankers may have short-term operational independence, but the government ultimately controls appointments and oversees the budget. In many countries, governments also have the power to redesign monetary policy.

Economists who are convinced of the central bank's inflation-targeting system and regard existing arrangements as sacred and inviolable have failed to recognize that the idea that central bank independence helps control inflation appeared only 40 years ago. Although Finn Kidland and Edward Prescott won the Nobel Prize in Economics in 2004 for suggesting inflationary bias in monetary policy, their proposed solution — simply instructing the central bank to follow specific guidelines — was rather naive. The same is true of the modern inflation-targeting system, or the so-called Taylor rule.

The problem is that simple rules will inevitably run into periods of poor results and must be completely revised. For example, after the 2007-09 global financial crisis, central bankers' views on what level restrictive policy interest rates should be at changed dramatically. Now it seems like this is happening again. In these critical times, central banks are extremely vulnerable to political pressure.

In fact, the COVID-19 pandemic has brought long-dormant political and economic forces back to the surface. As I pointed out in a recent paper co-authored with Hassan Afrouzi (Hassan Afrouzi), Marina Halac (Marina Halac), and Pierre Yared (Pierre Yared), these forces are unlikely to disappear anytime soon. Although the post-pandemic period was characterized by increased uncertainty, and macroeconomic trends were difficult to predict, this was a time when central banks preferred to risk high inflation rather than large-scale recession. After all, people may not like inflation, but they are even less fond of deep recessions and financial crises.

Economic uncertainty is likely to remain high as geopolitical tensions rise and global economic growth slows. This is partly because the central bank's “New Keynesian” forecasting model, although fancy, is essentially based on inference. In other words, they perform well under stable conditions, but are often unable to predict major turning points. At such critical times, central banks are particularly vulnerable to political pressure, and it is often more effective to look for historical parallels or consider other countries' experiences.

What is certain is that a spike in inflation does not happen every year. However, a new round of inflation is likely to occur sooner than expected by the market. In the face of economic uncertainty, central banks may not target high inflation, but they may adjust interest rate policies to make high inflation more likely than a deep recession or financial crisis.

Although economists are all aware of this trend of central banks, financial markets are unaware of it, probably because the information conveyed by central banks has been extremely effective over the past few decades. Central bank officials understand that once the market doubts the central bank's intentions, interest rates will quickly reflect rising inflation expectations. However, this perception is unlikely to help them withstand pressure from politicians, who tend to focus only on the next election and may prioritize other issues rather than stabilizing short-term inflation.

While governments can take steps to strengthen the independence of central banks, these measures are unlikely to be implemented in today's populist environment. Central banks are struggling to ensure that inflation remains within target limits; instead, they are under increasing pressure to focus on issues they lack the necessary tools, expertise, or political legitimacy to address, such as inequality, climate change, and social justice.

Central bankers certainly want to meet the inflation target, but they always need to be wary of their own politicians. In order to maintain independence under increasing pressure, central banks need to be flexible and occasionally make concessions, which could lead to another spike in inflation in the next 10 years after the pandemic. Therefore, realistic investors should understand that even if central banks now try to control high inflation, inflation will inevitably return faster than most current predictions.