The real problem in fighting inflation is credibility

Debates about inflation tend to collapse into a single question: will rates go up or not? Yet price stability is never secured by a number on its own. It is secured by the consistency behind that number. Markets do not price a decision; they price their belief in its continuation.

Put simply: monetary policy touches expectations before it touches the economy.

Why expectations decide everything

Pricing decisions are forward-looking. A business sets its price not by today's costs but by the costs it expects over the next six months. Wage bargaining, rent contracts and long-term supply agreements all follow the same logic.

Inflation can therefore become a story that feeds itself:

• If expected inflation is high, prices are adjusted in advance.
• Prices adjusted in advance push realised inflation up.
• Realised inflation confirms the expectation once more.

Breaking that loop means convincing economic actors that this time is different. And conviction is produced by consistent behaviour, not by communication alone.

A central bank's most valuable asset is not its balance sheet but the widespread belief that it will keep its word. That belief accumulates over years and can evaporate with a single surprise.

The institutional frame — the part that is not technical

Compare successful disinflation programmes and the common denominator is rarely the sophistication of the model. It is the clarity of the institutional frame. Three elements stand out:

1. A single objective. Targeting the exchange rate, growth, employment and inflation at once leaves it unclear which will be sacrificed — and that ambiguity is written straight into the risk premium.
2. Predictable timing. Both the calendar and the reasoning must be known in advance. Surprises may look effective in the short run, but they erode the expectations anchor.
3. Alignment across institutions. Loosening fiscal policy while monetary policy tightens means running two engines in opposite directions.

None of these is an econometric problem. All three are about how political choices are translated into institutional practice.

Costs now, benefits later

Tightening shows its costs in the first quarters: growth slows, employment weakens, the credit channel narrows. The benefits arrive with a lag. That asymmetry is where programmes are most fragile — political calendars rarely have the patience the lag requires.

Most programmes are abandoned not for technical reasons but because the patience budget runs out at precisely this point.

What should be done?

Rather than a shortcut prescription, it is more useful to sharpen the criteria. Three questions are enough when following any disinflation programme:

• Do decision-makers announce bad news on the same schedule as good news?
• When a target is missed, is the gap closed by changing the definition?
• Do the components of policy contradict one another?

The answers carry more information than any leading indicator.

In closing

Inflation looks like a price problem. It is really a coordination problem: millions of actors have to believe the same story about the future. And that story is written not by any single rate decision, but by the record those decisions build over years.

Credibility is the cheapest instrument monetary policy has. Once lost, it is the most expensive.