4 ms·

Nope, I would expect it to do close to nothing to inflation. The current inflation is primarily caused by high energy prices, secondary by shortages (semicondu

by fleddr 4y ago

Nope, I would expect it to do close to nothing to inflation. The current inflation is primarily caused by high energy prices, secondary by shortages (semiconductors, grain, vegetable oils, etc) and third (delayed effect) higher wages due to worker shortages. In theory, a rate hike reduces demand. But it won't for the above goods and services as they're barely optional. People are going to continue to heat their houses, vehicles will keep moving, factories won't be shut down at scale. People won't stop eating either. I believe the much more aggressive rate hikes by the FED, multiple already, validate this point. It's not done nothing to reduce inflation. I'm thinking it's going to be energy savings (by consumers and industry) and working on energy alternatives/abundance to really kill high inflation. Another example of a non-working instrument: here in the Netherlands the long term mortgage rate (15-20 year fixed rate) has more than tripled in just 4 months time. It doesn't even move the needle in house prices. It has slightly slowed down growth, and that's it. The reason it doesn't work is because there's no supply and the demand is not that elastic. People need a place a live.

legulere 4y ago
At least in Europe it’s more company profits rather than wage raises that cause inflation. In Germany tax revenues went up 10% for wage taxes while going up 30% for company profits last year. In Germany apartment prices went down in few cities with an overheated market. If prices stagnate long enough inflation effectively makes prices go down like in Germany from 2000 to 2010
- fleddr 4y ago
  True, the relation between wages and inflation is complicated. A lot of companies in Germany (same in the Netherlands) are exporters. The products they produce are not consumed by local consumers, hence higher wages do not increase local inflation. Similarly, for some companies wages are a limited part of their expenses. Some factories have like 10 workers to produce millions of items of output.
notch656a 4y ago
inflation is dependent upon what money can buy, the amount of money, and the velocity of it. I agree generally with everything you said, with the addition that the euro supply had rather significant ~7% "leap" in early 2020 (in addition to the trend line of compound growth). I don't think the effect of this "money printing" effect can be discounted either. https://www.statista.com/statistics/921364/value-of-m2-money-supply-in-euro-area/ https://www.statista.com/statistics/921364/value-of-m2-money...
zethus 4y ago
> I believe the much more aggressive rate hikes by the FED, multiple already, validate this point. It's not done nothing to reduce inflation. It's way too early to make this claim. Fiscal policy such as setting interest rates has been studied and projected to take anywhere from 9 months to 24 months to see an effect on inflation metrics such as CPI. We won't know if what the Fed has done will have its desired effect until much later. We can only do what has been observed to have worked in the past and hope other secondary inflation drivers (i.e. supply shortages, commodities crisis) continue to die down. [1] https://www.lancaster.ac.uk/staff/ecajt/inflation%20lags%20money%20supply.pdf https://www.lancaster.ac.uk/staff/ecajt/inflation%20lags%20m...
fauigerzigerk 4y ago
I think the purpose of raising interest rates is mainly to bring inflation expectations down and stop the wage price spiral. If central banks fail to achieve that goal then inflation is going to last many more years. Nobody expects interest rate hikes to have an immediate, direct effect on prices. The immediate effect it is supposed to have is not on energy prices but on wage negotiations.
- fleddr 4y ago
  The current inflation isn't caused by wages, it's caused by energy prices.
  - fauigerzigerk 4y ago
    Exactly, energy and the aftermath of covid. But central banks can't do much about that. What they're trying to do is stop the next round of inflation that would be caused by wage rises if everyone is fully compensated for the current round of inflation expecting the round after that to follow suit. If these expectations become entrenched the cycle is very hard to break. Only a severe recession with high unemployment will work at that point and nobody wants that.

by fleddr 4y ago

legulere 4y ago

At least in Europe it’s more company profits rather than wage raises that cause inflation. In Germany tax revenues went up 10% for wage taxes while going up 30% for company profits last year. In Germany apartment prices went down in few cities with an overheated market. If prices stagnate long enough inflation effectively makes prices go down like in Germany from 2000 to 2010

fleddr 4y ago
True, the relation between wages and inflation is complicated. A lot of companies in Germany (same in the Netherlands) are exporters. The products they produce are not consumed by local consumers, hence higher wages do not increase local inflation. Similarly, for some companies wages are a limited part of their expenses. Some factories have like 10 workers to produce millions of items of output.

notch656a 4y ago

inflation is dependent upon what money can buy, the amount of money, and the velocity of it. I agree generally with everything you said, with the addition that the euro supply had rather significant ~7% "leap" in early 2020 (in addition to the trend line of compound growth). I don't think the effect of this "money printing" effect can be discounted either. https://www.statista.com/statistics/921364/value-of-m2-money-supply-in-euro-area/ https://www.statista.com/statistics/921364/value-of-m2-money...

zethus 4y ago

> I believe the much more aggressive rate hikes by the FED, multiple already, validate this point. It's not done nothing to reduce inflation. It's way too early to make this claim. Fiscal policy such as setting interest rates has been studied and projected to take anywhere from 9 months to 24 months to see an effect on inflation metrics such as CPI. We won't know if what the Fed has done will have its desired effect until much later. We can only do what has been observed to have worked in the past and hope other secondary inflation drivers (i.e. supply shortages, commodities crisis) continue to die down. [1] https://www.lancaster.ac.uk/staff/ecajt/inflation%20lags%20money%20supply.pdf https://www.lancaster.ac.uk/staff/ecajt/inflation%20lags%20m...

fauigerzigerk 4y ago

I think the purpose of raising interest rates is mainly to bring inflation expectations down and stop the wage price spiral. If central banks fail to achieve that goal then inflation is going to last many more years. Nobody expects interest rate hikes to have an immediate, direct effect on prices. The immediate effect it is supposed to have is not on energy prices but on wage negotiations.

fleddr 4y ago
The current inflation isn't caused by wages, it's caused by energy prices.
- fauigerzigerk 4y ago
  Exactly, energy and the aftermath of covid. But central banks can't do much about that. What they're trying to do is stop the next round of inflation that would be caused by wage rises if everyone is fully compensated for the current round of inflation expecting the round after that to follow suit. If these expectations become entrenched the cycle is very hard to break. Only a severe recession with high unemployment will work at that point and nobody wants that.