When inflation hits, central bankers get scared. They fear inflation as much as they fear deflation, and would go to great lengths to bring inflation under control, even if it means risking an economic recession. This explains the reaction of the Federal Reserve of the US, the Bank of England and the European Central Bank. The Federal Reserve has been the most aggressive in raising interest rates, just as it was the most aggressive when it came to reducing interest rates and implementing quantitative easing. It implemented a loose monetary policy to get the US out of the credit crunch, the crisis in the financial markets and the resulting economic recession a decade ago and is fervently adopting a tight monetary policy to overcome the challenge posed by inflation. There was a time when central banks were taking the necessary steps to push inflation towards the target of two per cent. Now that it has been surpassed in a significant way, they want to slow economies down. Governments did not do much to stimulate the economy because of the high (and in some cases unsustainable) level of public debt they had, and allowed the economy to move on the basis of cheap money. The era of...