How Not to Fight Inflation
A careful look at US economic conditions supports the view that inflation was driven mainly by supply-side disruptions and shifts in the pattern of demand. Given this, further interest-rate hikes will have little to no effect – and will cause far-reaching problems of their own.
NEW YORK – Despite favorable indices, it is too soon to tell whether inflation has been tamed. Nonetheless, two clear lessons have emerged from the recent price surge.
First, economists’ standard models – especially the dominant one that assumes the economy always to be in equilibrium – were effectively useless. And, second, those who confidently asserted that it would take five years of pain to wring inflation out of the system have already been refuted. Inflation has fallen dramatically, with the December 2022 seasonally adjusted consumer price index coming in just 1% above that for June.
There is overwhelming evidence that the main source of inflation was pandemic-related supply shocks and shifts in the pattern of demand, not excess aggregate demand, and certainly not any additional demand created by pandemic spending. Anyone with any faith in the market economy knew that the supply issues would be resolved eventually; but no one could possibly know when.
To continue reading, register now.
Subscribe now for unlimited access to everything PS has to offer.
As a registered user, you can enjoy more PS content every month – for free.
Already have an account? Log in