Inflation since 2021 has been predominantly a supply-side phenomenon: energy and food price surges, pandemic-era bottlenecks and profit mark-ups in concentrated sectors, later compounded by war. Yet the policy response was almost entirely monetary. Central banks raised rates against shocks they could not reverse, aiming to mute second-round effects but at a significant cost to investments – including those needed to relieve the supply constraints that generated the inflation in the first place.
This will not be a one-off. Climate change and environmental degradation are turning supply shocks from occasional disturbances into recurrent, possibly permanent, features of the inflation landscape. A 2026 study from University College London’s Institute for Innovation and Public Purpose argues that ‘environmental breakdown’ will confront central banks with overlapping shocks to food, energy and critical inputs that conventional inflation targeting is structurally ill-equipped to handle. Its central point is well supported: the expectations channel on which the case for rate-led disinflation rests is weak. Households and firms are largely inattentive to central bank communication and their inflation expectations respond to petrol and grocery prices far more than to policy signals.
If interest rates are a blunt and costly instrument against supply-driven inflation, governments need a broader policy toolkit.
Instruments complementing central bank independence
The emerging toolkit organises into four categories. Shock absorbers – targeted transfers and temporary tax relief on demand-inelastic essentials – cushion real incomes without the collateral damage of generalised tightening, provided they are targeted, budget-financed and explicitly temporary. France’s targeted fuel rebate for lower-income commuters is an example: cheap to administer, easy to sunset and narrow enough not to add materially to aggregate demand.
Price interventions – strategic caps on a narrow basket of essentials and windfall profit taxes on shock-driven rents – can arrest price spirals at their source, but only as emergency instruments: prolonged caps distort investment signals and breed shortages. Mexico deployed strategic caps with some success in 2022–23. The European Union’s temporary levy on windfall energy profits in 2022 and the UK’s Energy Price Guarantee capping household bills, illustrate both the appeal and the fiscal cost of this instrument: fast relief, financed at scale, that had to be unwound as soon as wholesale prices normalised.
Quantity interventions such as physical buffer stocks of grains, energy and critical minerals, as well as their ‘virtual’ counterpart in commodity derivatives markets, attack supply-driven inflation at its origin; the US strategic petroleum reserve releases of 2022 demonstrably lowered oil prices. Structural resilience interventions, like industrial policy for input security, competition policy in concentrated supply chains and public investment in energy diversification, reduce exposure to shocks over the medium term. The cheapest inflation to fight is the one that never materialises.
The UCL study adds an institutional proposal: a standing coordination body, descended from the US Office of Price Administration or Indonesia’s inflation control teams, tasked with monitoring systemically significant prices across government. The idea deserves attention, provided such a body complements central bank independence rather than dilutes it.
The blind spot in the new toolkit
The new toolkit literature correctly diagnosed the weakness of the household expectations channel. However, it risks concluding that credibility matters little for inflation control. That conclusion mistakes where credibility operates.  As I have argued through the portfolio theory of inflation, the channel that disciplines prices in open economies runs through the portfolio decisions of global investors. They continuously choose whether to hold or shed a sovereign’s currency and debt.
This channel cuts both ways. In a high-credibility economy, a supply shock remains a relative-price event: the exchange rate holds, imported inflation stays contained, the shock washes through. In a highly indebted economy with weak policy credibility, on the other hand, the same shock triggers portfolio reallocation away from sovereign liabilities, currency depreciation and imported inflation, amplifying the original disturbance rather than absorbing it.
The mechanism reflects a structural feature of how sovereign liabilities get priced once debt levels are already elevated, the marginal investor is the first to withdraw, and the price demanded for taking on that risk rises accordingly. This is why credibility does not show up first in survey measures of trust, but in the yield a government pays to place new debt, the spread it carries over a reference rate and the speed with which portfolio flows reverse once conditions change. Policy-makers who have lived through a funding crisis know none of this is abstract; they are the practical constraints within which every instrument in the new toolkit has to operate.
Every instrument in the new toolkit is credibility-intensive. Price caps, transfers, subsidies and buffer stocks all draw on the sovereign balance sheet. Deployed by a government whose liabilities investors are already shedding, they do not stabilise prices and may even accelerate the run. Argentina’s long experience with price controls amid fiscal dominance is the cautionary tale; Spain’s success in 2022, under the euro’s credibility umbrella, is the counterexample: fiscal tools deployed where credibility was already present.
The question is not whether fiscal and supply-side instruments can outperform monetary tightening against supply shocks, but how to deploy them without eroding the sovereign’s capacity to absorb the liabilities that finance them.
Four proposals
First, make fiscal anti-inflation policy rules-based rather than discretionary: pre-legislated stabilisers with defined triggers, caps and sunset clauses deliver speed while signalling to markets that interventions are bounded. This also reduces the temptation to expand support during a downturn for political rather than economic reasons and to withdraw it too slowly once the shock has passed.
Second, give central banks a formal surveillance role over systemically significant prices. The UCL study makes a case for central banks to use their research capacity to track staple and commodity prices as an early-warning system. This monitoring function should sit with the central bank because it is insulated from short-term political pressure, not with a new cross-government body that would dilute that insulation.
Third, build buffer stocks that target speculation, not just scarcity. The UCL study also points to proposals for a ‘virtual buffer stock,’ akin to a currency reserve, that intervenes in commodity derivatives markets when prices move. Reserve policy along these lines should carry the same transparent rules of engagement that foreign exchange intervention frameworks already operate under, with clear triggers for when intervention starts and stops.
Fourth, define an explicit division of labour: monetary policy defends the portfolio channel and the exchange rate anchor; fiscal, industrial and competition policy address the underlying disruption. Neither should be asked to compensate for the other’s limits and each authority should be judged against a mandate it can actually deliver.
Supply-side inflation is not going away. The answer is neither monetary overkill nor fiscal abandon, but a richer toolkit deployed under a constraint the new literature largely ignores. In the end, all anti-inflation policy is spent in the currency of credibility.
This raises an institutional question: how to build institutionalised co-operation without recreating the capture the wall was built to prevent?
This is the first in a two-part series on the topic. Stay tuned for part two.
Biagio Bossone is an adviser to international financial institutions and national central banks.Â
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