A central bank observes that inflation has been persistently above its target. Surveys indicate that households and firms now expect this higher inflation to continue indefinitely. To restore credibility and bring inflation back to its target, which sequence of events correctly describes the necessary, albeit costly, policy path?

Central Bank Policy Dilemma

A central bank is facing a situation where inflation is persistently high, and public expectations of future inflation have risen far above the official target. Arrange the following policy actions and economic outcomes into the logical sequence the central bank must follow to restore its inflation target.

The Rationale for a Costly Disinflationary Policy