> What was happening was that since wage increases came to be anticipated due to the consistent low interest rate/moderate to high inflation environment, produc

> What was happening was that since wage increases came to be anticipated due to the consistent low interest rate/moderate to high inflation environment, producers would preemptively raise prices to soak up all of the wage gains. > Eventually stagflation was ended by dramatically raising interest rates and triggering a nasty recession. An alternative explanation is that, since interest rates were lower than the rate of inflation, producers issued bonds to finance stock (raw commodities and semi-finished goods), which pushed up both the inflation rate and bond interest rates. While the rate of inflation was higher than the bond interest rate, the incentive remained for producers to issue bonds and use the proceeds to hoard stock. In combination with this, the increasing demand for consumer goods — because of rising inflation — caused the yield on retail shelf space to increase. I.e. if people empty a shelf of flour twice as fast, because they want to stock up before prices increase, the yield on the capital that is retail shelf space doubles. This meant the Fed lost control over the short term deposit rate, since money market funds were able to overbid the Fed by financing the inventory of retail stores. Thus, the Fed lost control over the short term rate of interest, which kept increasing along with the rate of inflation.