Inflation Horror Story Isn’t Over. Just Ask Australia.

Economists are scrutinizing every piece of data, survey and report available in a frantic effort to divine where the global financial system is headed. It might be easier just to follow the action at Reserve Bank of Australia headquarters in Sydney.

Or, more to the point, the growing controversy there, after an institution that had been among the soundest anywhere for 25 years lost the plot on inflation.

From 1996 to 2006, Ian Macfarlane ran the RBA with a deftness that drew attention at Federal Reserve central in Washington. Officials like then-Fed Chairman Alan Greenspan and deputies Alice Rivlin, Edward Kelley and others were riveted by the inflation-targeting regime the RBA adopted in 1993. Macfarlane’s team tested its quirks and limits skillfully.

Glenn Stevens took the RBA controls in 2006. Like the recreational pilot he was on weekends, Stevens too managed to achieve many a soft landing.

In 2016, Stevens turned the cockpit over to Philip Lowe, who at the time seemed a steady hand. Lowe has since allowed RBA policy to go off course in ways that are painful to watch.

Like current Fed chief Jerome Powell, Lowe was slow to react to resurgent inflation as nations scrambled to reopen from Covid-19. Australia’s is above 7% year on year.

Now, Lowe seems intent on driving Australia’s economy into recession—a deep one if needed—to get inflation back into the 2% to 3% range.

Stephen Koukoulas at Market Economics speaks for many when he calls the RBA’s failure to stay ahead of overheating risks a “horrendous error.” Really, “what a dreadful track record and legacy” for Lowe, Koukoulas adds.

What a preview, too, of what other central banks may soon be dealing with. The message Australia is sending economies from Asia to the West: rumors inflation had peaked and central banks are done tightening were greatly exaggerated.

Analyst Craig Erlam at OANDA notes that the minutes of the RBA’s recent policy meeting “highlighted how unnerved policymakers are by recent inflation developments, with a pause in tightening not even discussed despite that at one stage appearing to be where the central bank was heading.”

In fact, Erlam observes, “the debate centered around whether there was a need to accelerate the hiking cycle which may unsettle investors that have become more relaxed on the belief that the end is near.”

The message from Sydney, Erlam says, is one “often not heard from policymakers around the world.” It’s that “there’s more to do and that rates may need to stay higher for longer, but investors have not always been receptive to that.”

The upshot is that America’s inflation horror story might not be ending, as hoped. That means the Powell Fed, too, may need to keep tapping the brakes more assertively than makers believe.

The minutes of the Fed’s Jan. 31-Feb. 1 policy meeting signaled that concern over inflation remains high. Price pressures “remained well above” the Fed’s 2% target, officials agreed. Labor markets “remained very tight, contributing to continuing upward pressures on wages and prices.”

Though recent data suggest things may be cooling down, the minutes showed that Fed officials “stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path.” Bottom line, the majority agreed, “ongoing” rate hikes remain on the table.

China’s rapid reopening hardly helps. U.S. inflation was already at 40-year highs when Beijing suddenly ended “zero Covid” lockdowns. Now, Asia’s biggest economy is pumping fresh demand into the global financial system. And a fresh reason to worry about more inflation.

This has central bankers taking hints that inflation is easing with a big grain of salt—sensing more price turbulence ahead.

Fitch Ratings analyst Pawel Borowski points out that headline “inflation rates, although still high, moderated in recent months and showed the first signs of abating in many” top economies. They include the U.S., eurozone, Germany, Italy, Spain, Canada, Brazil, Russia and Turkey, among others.

And yet “simultaneously, central banks have continued with hiking cycles and policy interest rates have risen” in many of these countries in recent weeks, Borowski notes. Events in Sydney could be the missing link here.

Soon, this might even be the case with the Bank of Japan. Asia’s No. 2 economy is also suffering the worst inflation in 40 years at a moment when the economy is barely growing. Japan’s roughly 4% inflation is double the BOJ’s 2% target.

“We expect the modest recovery to continue this year,” says economist Min Joo Kang at ING Bank. “But it is questionable whether it is going to be strong enough for the Bank of Japan to make progress in normalization as rapidly as expected by the market.”

Then again, events in Sydney remind central banks of the dangers of patience. It’s complicated, of course. So much of today’s inflation is coming from forces that tighter monetary policy really can’t stop: Vladimir Putin’s Ukraine invasion and Covid-related supply chain disruptions.

Even so, the idea that the normal tools of monetary economics still apply—the ones Lowe has been following at the RBA—needs serious revision. Australians are learning that the hard way.