Central banks have faced many challenges over the past decade and in general, have possessed the right tools to achieve its job. While no one would argue that it's achieved optimum levels of equilibrium, it's also clear that they have avoided the worst-case effects.
However, their toolkit is less impactful when it comes to supply-side, energy-driven, inflationary spirals like what we are seeing in Europe. In essence, this is a direct consequence of Russia's invasion of Ukraine and the ensuing set of sanctions. Russia is retaliating by inflicting pain on European households and businesses by shutting off the flow of natural gas.
As a consequence, electricity prices have soared across the continent, placing massive strain on these economies and adding to inflation. The central bank's solution of raising rates to reduce aggregate demand to cool price pressures doesn't solve the underlying problem of increasing investment in new energy production. Although, it can fix the short-term inflation problem by engineering a recession.
However, there is some relief as electricity prices have plunged as Ukraine has made huge gains in winning back land and territory that it had slowly ceded to Russia over the last few months. According to reports, Russian troops are in retreat, and the Army's capacity to bring in fresh troops seems limited. More and more Russians are speaking out against the war whether it's those on TV, retired generals, or leaders at the state and local levels.
Additionally, Europe has been making serious efforts to diversify its energy production which includes bringing back nuclear and increasing imports of coal and natural gas. There are longer-term plans to build more LNG terminals and pipelines which is bullish for U.S. natural gas producers as well.
Barring an extremely cold winter or a re-escalation of the war, it seems that the worst may have passed in terms of electricity prices even if they will remain materially higher than pre-war levels. The E.U. is also passing some measures to alleviate the pain by issuing a profits tax on energy firms, reducing overall energy usage, and even potentially a cap on the gas price.