Central banks must react to inflation even if it subsides spontaneously – Natixis

Analysts at Natixis show in the cases of the United States and the eurozone that after an inflationary shock, inflation subsides spontaneously. But this does not absolve the central banks from acting against inflation.

Inflation subsides spontaneously, but too slowly to stabilise the price level

“The inflation dynamics is stable: inflationary shocks in the US and the eurozone gradually disappear.” 

“In reality, central banks must react to inflation even if it subsides spontaneously. The pace of inflation’s retreat is slow. This means that if the central bank does not act to accelerate the rate of disinflation, inflation expectations may diverge. The price level has time to rise above the reference price level, leading to a loss of cost competitiveness and a loss of credibility for the central bank.”