Global Macro Chart of the Day: (#111): The illusion of central bank control

Research evidence excerpt

Global Macro Chart of the Day: (#111): The illusion of central bank control

Global Research

26 June 2026ab

Global Macro Chart of the Day Economics

Global(#111): The illusion of central bank control

Arend Kapteyn

Economist

Most of the variation in DM inflation is beyond central banks' control arend.kapteyn@ubs.com

+44-20-7567 0531

Central banks are sometimes given too much credit - or too much blame - for outcomes

that lie largely beyond their control. Before the pandemic, in advanced economies (DM),

73% of deviations in inflation from its long-term trend could be attributed to food and

oil prices, which are primarily driven by global factors and weather rather than monetary

policy.

Since 2020, a larger share of inflation has been explained by other forces, such as

pandemic-related goods shortages and supply-chain disruptions. Again, it is not clear

how much of this falls within the influence of central banks. Monetary policy can, of

course, affect domestic demand through various transmission channels and influence

the output gap. Indeed, when supply shocks spill over into higher services and wage-

price inflation, monetary policy is well suited to rein inflation back in. However, earlier

research suggests the output gap explains only about 15% of inflation variability.

One could argue that the stability of inflation expectations - and of the trend itself -

reflects central bank credibility, achieved through effective communication and

confidence in their ability to bring inflation back to target. Yet, given their limited control

over the more volatile drivers of inflation, this credibility may owe as much to favourable

circumstances and self-correcting supply shocks as to policy itself.

Figure 1: Oil and food explain most of the inflation deviation from trend in DM