He reluctantly admits that “ supply chain collapses, increased deficits, and the oil price spike all probably did contribute to the inflation of 2021-22.”īut he rejects the ‘greedflation’ theory of inflation that claims it is all due to greedy monopoly companies using market power to hike prices. He dismisses modern monetary theory as failing to explain inflation or the hyperinflation theory of cryptocurrency enthusiasts. Smith claims that mainstream economic policy has worked. But right now, ‘core’ inflation remains close to 5% a year. He bases this on measuring inflation rates in the most inflationary sectors. Smith claims that the 2% inflation target will soon be met in the US. Take Noah Smith, a prolific mainstream economics blogger. Now the situation is in reverse.ĭespite the abject failure of monetary policy to affect inflation rates, mainstream economics continues to claim that it does and there is no alternative to raising interest rates. Instead, there was credit-fuelled boom in stock and bond prices. Despite huge dollops of money injection (quantitative easing) and zero interest rates, price inflation refused to reach the 2% targets in the major economies (and shas not succeeded in Japan now). This is the current policy of the Bank of Japan. I am reminded by the claim by central banks back in the 2010s that they needed to keep interest rates near zero or even below in order to boost ‘demand’ and avoid inflation going under 2% or even into deflation. In short, central banks continue to hike interest rates despite the failure of this policy to have any significant effect on the prices of goods and services, despite claims to the contrary. But the pace of reduction is likely to slow because so-called ‘core’ inflation rates, which exclude food and energy, and in effect measure ‘underlying’ or ‘domestic’ inflation of prices in an economy, have remained ‘sticky’, i.e well above the 2%. The IMF reckons that global inflation will drop 6% a year now to 4% a year, but not until the end of 2024. The US inflation rate has fallen back to 3% a year and Spain’s even below 2%. Yes, so-called headline inflation has been falling fast as food and energy supply improved and prices for these essentials dropped back. At his press conference this week, Fed chair Powell said that the Fed’s 2% target would not be reached before 2025! It is more likely that the US economy will have been driven into a slump before then. Despite the huge rise in interest rates, and with more to come, consumer price inflation is still not back to anywhere near 2% a year. There was no ‘wage-price ‘ spiral as the central bankers claimed as one reason why interest rates had to rise on the contrary, it was profit-price spiral.īut here is the rub. We now know that it was profits that made the largest contribution to price rises in the last two years, not wages. In addition, the Russian invasion of Ukraine added another accelerator to price rises. In addition, multi-national food and energy producers took advantage of the supply blockages to raise prices and increase profits (and to some extent, lever up their ‘mark-ups’ on costs). As a result, in particular, basic commodities (food and energy) rose sharply in price, driving up import prices for most countries. And yet the evidence on the causes of the inflationary spike since the end of the pandemic slump clearly shows that it was a supply ‘shock’ (the word used by the mainstream to describe anything disturbing the supposed harmony of supply and demand in a market economy).Īfter the pandemic, global production was slow to recover as healthy labour was in short supply and international trade and transport was clogged with obstacles. The latter side of the price equation is ignored. It assumes that the cause of inflation is excessive demand and not insufficient supply. So raising interest rates, by increasing the cost of borrowing (mortgages, consumer credit and loans to firms), will slow down spending and investment sufficiently to bring ‘demand’ back into line with ‘supply’.Īs I and many others have argued, this theory is full of holes. This policy is based on the theory that accelerating inflation was being caused by ‘excessive demand’ by consumers (workers). The ostensible reason for this is that hiking interest rates until the pips squeak in the economic orange will eventually get the inflation rate of consumer prices down to the (arbitrary) central bank targets of 2% a year. The Fed rate now stands at its highest in 22 years. Both the Federal Reserve and the European Central Bank raised their policy interest rate again this week.
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