A Balanced Response to Inflation
Although it is anyone's guess what will happen next with inflation, the data show that there is no reason to react rashly with large across-the-board interest-rate hikes. The economy is working through an unprecedented transition that could ultimately be a boon for workers; but only if policymakers let the process play out.
NEW YORK – Although some supply shortages were anticipated as the global economy reopened after the COVID-19 lockdowns, they have proved more pervasive, and less transitory, than had been hoped. In a market economy that is governed at least in part by the laws of supply and demand, one expects shortages to be reflected in prices. And when individual price increases are lumped together, we call that inflation, which is now at levels not seen for many years.
Nonetheless, my biggest concern is that central banks will overreact, raising interest rates excessively and hampering the nascent recovery. As always, those at the bottom of the income scale would suffer the most in this scenario.
Several things stand out in the latest data. First, the inflation rate has been volatile. Last month, the media made a big deal out of the 7% annual inflation rate in the United States, while failing to note that the December rate was little more than half that of the October rate. With no evidence of spiraling inflation, market expectations – reflected in the difference in returns on inflation-indexed and non-inflation-indexed bonds – have been duly muted.
Correction Feb 8, 2022 09:18UTC
In the fourth paragraph, energy prices rose at a seasonally adjusted annual rate of 30% in December 2021, not by 30% over November 2021.