The Inflation Illusion: Why Central Banks Are Fighting the Wrong Battle

By Jacob Kim Feb. 13, 2025

For the first time in modern monetary history, the world may be suffering from the wrong kind of inflation—and fighting it with the wrong tools. Prices are rising, but not because of overheated demand or reckless spending. They are rising because of structural monopolies, logistical fragility, and climate volatility. Yet central banks continue to treat the problem as though it were still 1979.

The International Monetary Fund (IMF Global Inflation Dynamics Report, 2025) confirms that over 60 percent of current inflation in advanced economies originates from supply-side distortions rather than aggregate demand. Nonetheless, most central banks have responded with the same prescription: higher interest rates, slower growth, and disciplined austerity.

The diagnosis is elegant. The cure is destructive.

The Monetary Mirage

Inflation targeting has been the cornerstone of global macroeconomic stability since the 1990s. By adjusting short-term interest rates, central banks sought to control consumer expectations. The model assumed a simple relationship: too much money chasing too few goods.

But the post-pandemic economy revealed a different pathology. The OECD Price Structure Audit (2025) found that in the U.S., profit markups accounted for 53 percent of price increases during 2021–2024—triple their historical average. This phenomenon, now termed “greedflation,” was driven not by scarcity but by corporate pricing power.

Monetary tightening cannot discipline monopolies.

Supply Chains as the New Inflation Engine

Modern inflation is not born in shopping malls—it begins in shipping yards. The global economy’s dependence on complex, fragile supply networks has created what economists call “supply-chain inertia,” where shocks persist long after the triggering event.

The World Trade Organization (WTO Logistics Vulnerability Index, 2025) notes that maritime shipping rates remain 38 percent higher than pre-pandemic levels, even after demand normalized. Energy logistics, semiconductor shortages, and rare-earth dependencies further compound systemic rigidity.

Raising interest rates does not unclog ports, reopen mines, or regrow crops—it merely punishes borrowers downstream.

The Climate Cost Spiral

A new inflationary force is emerging: climate volatility. Droughts, floods, and heatwaves are disrupting production across critical sectors. The World Bank Climate Risk Pricing Report (2025) estimates that one-third of food price inflation in 2024 resulted from weather-related shocks.

The economic vocabulary of inflation—wages, output gaps, interest rates—was never designed to price planetary instability. As climate-driven scarcities cascade through markets, central banks face a dilemma: they can cool economies, but not the planet.

Monetary tightening in the face of environmental inflation is like fighting a wildfire by raising water prices.

The Weaponization of the Interest Rate

Interest rates, once a macroeconomic lever, have become a blunt political weapon. The Bank for International Settlements (BIS Monetary Policy Review, 2025) reveals that global debt servicing costs rose by US $1.3 trillion between 2022 and 2024 due to synchronized rate hikes. Emerging markets—already burdened by dollar-denominated debt—faced catastrophic capital outflows and currency depreciation.

Higher rates crushed small business investment and housing affordability while leaving corporate giants largely insulated through long-term bond issuances. In essence, monetary policy redistributed wealth upward.

Inflation slowed—but inequality accelerated.

The Shadow Economy of Prices

Another distortion hides beneath official statistics. Consumer Price Index (CPI) metrics exclude many of the costs driving real financial pain: rent volatility, private education, health insurance, and digital subscriptions. The London School of Economics (LSE Cost of Living Audit, 2025) concludes that CPI underestimates actual inflation by 2.6 percentage points in OECD economies.

Households live in an inflation reality that policymakers cannot see. The result is policy blindness—tight money amid real-world impoverishment.

The Myth of the Wage-Price Spiral

Central bankers often invoke the “wage-price spiral” as justification for contractionary policy. Yet empirical data contradicts it. The European Central Bank Wage Growth Survey (2025) found that real wages in the Eurozone declined 4.2 percent between 2021 and 2024, even as corporate profits soared.

Inflation has decoupled from labor entirely. Workers are not driving prices—they are absorbing them.

The continued invocation of wage inflation reveals a deeper truth: orthodox economics is haunted by the ghost of the 1970s.

Policy Capture and the Financial Lobby

Behind the persistence of rate orthodoxy lies political inertia. Central banks, designed as independent institutions, are now entangled with financial markets that profit from predictability. The Columbia Institute for Financial Studies (2025) documents that 82 percent of major central bank advisory committees include current or former representatives of global asset managers.

Every rate decision moves trillions in bond valuations. The incentive to preserve orthodoxy outweighs the motivation to rethink it.

Monetary independence has quietly become market dependence.

Beyond the Phillips Curve

The world needs a new framework—one that recognizes polycentric inflation: monetary, logistical, ecological, and geopolitical. Economists like Mariana Mazzucato and Joseph Stiglitz propose a Mission-Oriented Central Banking Model, integrating fiscal coordination, green industrial policy, and investment in public capacity.

According to the OECD Green Transition Scenario (2025), coordinated green spending and supply-chain resilience policies could reduce inflationary volatility by 40 percent over the next decade—without relying on mass unemployment as a stabilizer.

It is not higher rates that cool economies—it is smarter systems.

Rethinking the Mandate

Central banks were built to manage money; the modern world demands that they manage complexity. The new inflation is not a monetary phenomenon but a structural one—embedded in the architecture of globalization itself.

The future of price stability will depend not on suppressing demand, but on redesigning production, distribution, and energy systems to withstand shocks.

If inflation once meant too much money chasing too few goods, today it means too few ideas chasing too old models.

Works Cited

“Global Inflation Dynamics Report.” International Monetary Fund (IMF), 2025.

 “Price Structure Audit.” Organisation for Economic Co-operation and Development (OECD), 2025.

 “Logistics Vulnerability Index.” World Trade Organization (WTO), 2025.

 “Climate Risk Pricing Report.” World Bank, 2025.

 “Monetary Policy Review.” Bank for International Settlements (BIS), 2025.

 “Cost of Living Audit.” London School of Economics (LSE), 2025.

 “Wage Growth Survey.” European Central Bank (ECB), 2025.

 “Financial Studies Report.” Columbia Institute for Financial Studies, 2025.

 “Green Transition Scenario.” Organisation for Economic Co-operation and Development (OECD), 2025.

 “Mazzucato, Mariana, and Joseph Stiglitz.” Mission-Oriented Economics and the Future of Policy, 2025.