The European Central Bank (ECB) has indicated a significant reduction in inflation, with the current rate aligning around its medium-term target of 2%.

This marks a notable achievement after a lengthy four-year battle against inflation, which intensified during the latter part of the COVID-19 pandemic due to supply chain disruptions and various supply shocks.

Over these four years, the inflation crisis has inflicted considerable financial strain on consumers.

In Spain, for instance, the Consumer Price Index (CPI) rose by 18%, equivalent to the increases seen over the previous 14 years.

However, when compared to historical inflation crises, the current episode has been notably shorter.

During the oil crisis of the late 1960s, Spain experienced a protracted period of inflation spiking for nearly 15 years before the CPI fell below 5%.

By 2022, inflation rates exceeded double digits in many European countries.

Despite this surge, long-term inflation expectations remained stable, indicating that economic actors viewed the crisis as a temporary episode.

This perception is crucial, as it reflects the ECB's success in maintaining public confidence throughout the inflationary period.

In the United States, inflation expectations soared as a result of increased tariffs, reaching levels not seen since 1991 according to surveys.

This regional discrepancy highlights differing responses to inflationary pressures across economies.

One major takeaway for central banks is the effectiveness of aggressive monetary policy in curtailing inflation.

Coordinated and decisive actions helped to anchor expectations within the economy.

Recent research from the ECB suggests that central banks must respond assertively to supply shocks, emphasizing the need for drastic interest rate hikes during such periods.

These increases can serve dual purposes of controlling inflation and stabilizing production levels, which are often threatened by high prices impacting company outputs.

According to researchers, timely and substantial monetary policy intervention is essential during inflationary crises.

Historically, previous inflation crises were often resolved at the expense of economic downturns; however, in the current context, central banks have managed to address inflation without triggering a recession.

This accomplishment reflects a shift in strategy that emphasizes the anchoring of inflation expectations and the strategic adjustment of interest rates as inflation subsides, allowing for potential economic breathing room.

Fiscal policy has also played a vital role in stabilizing growth during this period, providing assistance to households and businesses adversely affected by rising prices to prevent declines in demand.

Notably, cooperation among workers and unions has been instrumental, as they accepted short-term economic hardship to facilitate quicker resolutions to inflation.

This collective action has been pivotal in curbing the cyclical nature of price and wage increases that typically characterize inflation crises.

Following four years, the average wages across many developed countries, including Spain, have rebounded to pre-inflation levels, a process formalized in what the government termed a 'wage pact.'

Despite these advancements, the crisis demonstrated that inflation remains a persistent concern.

Continued vulnerabilities exist regarding supply chains and energy crises, suggesting that Europe must enhance its energy independence through renewable sources.

The dynamics of globalization have moderated inflation over recent decades, yet the current trend toward deglobalization could reintroduce price pressures.

Significant economic processes still threaten to spur inflation, while deflationary tensions may also emerge if growth continues to stagnate, constraining companies' ability to raise prices without losing customers.

Christine Lagarde, the President of the ECB, underscored the ongoing uncertainty regarding inflation during a recent press conference, acknowledging that while prices may be contained and expectations stable, the global economy remains susceptible to another inflationary crisis.

The lessons learned during this episode provide a revised framework for future monetary policy interventions to mitigate similar challenges.