Raising interest rates to curb demand – and thus inflation – is not the right solution, one analyst said, as high prices are mainly caused by supply chain shocks.
Global manufacturers and suppliers have been unable to efficiently produce and deliver goods to consumers during the Covid lockdown. And recently, sanctions imposed on Russia have also cut supply, mainly of goods.
Paul Gambles, managing partner at consulting firm MBMG Group, said: “Supply is so hard to manage, we’re looking across a whole range of industries, a wide range of businesses, they’re having challenges. very different formula just turning the faucets back on,” Paul Gambles, managing partner at consulting firm MBMG Group, told CNBC’s “Street signs“in Monday.
Referring to the energy crisis facing Europe when Russia threatened to cut off gas supplies, he said that “on America’s independence day, this is a day of codependency where Europe completely shoots itself. to his feet, because a lot of this came into being due to sanctions.”
“And the Feds were the first to raise their hands and say that monetary policy can’t do anything about the supply shock. And then they go and raise rates.”
The US Federal Reserve raised its benchmark interest rate by 75 basis points to the 1.5%-1.75% range in June – the biggest increase since 1994. Fed Chairman Jerome Powell (above) flagged that there could be another rate hike in July.
Mary F. Calvert | Reuters
However, governments around the world have focused on cooling demand as a means of curbing inflation. The rate hike is aimed at pushing demand up evenly with limited supply.
US Federal Reservefor example, increase its benchmark interest rate rose 75 basis points to the 1.5%-1.75% range in June – the biggest gain since 1994 – with the Chairman Jerome Powell flags that there could be another rate hike in July.
The Reserve Bank of Australia will raise interest rates again on Tuesday, and other Asia-Pacific economies such as the Philippines, Singapore and Malaysia have all jumped on the same path.
The Fed said in a statement it chose to raise rates as “overall economic activity” appears to have picked up in the first quarter of the year, with rising inflation reflecting “pandemic-related supply and demand imbalances, energy prices higher and broader price pressure.”
Monetary policy is the ‘wrong solution’
Gambles said demand is still below pre-pandemic levels, but will fall even without Covid barriers.
“If we look at where there are jobs in the United States, if we don’t have Covid, and we don’t have outages, we’re still about 10 million jobs short where we’re going. So there’s the fact that there’s quite a bit of potential for a decline in the labor market. Somehow that doesn’t translate into actual stagnation,” he said.
“And, again, I don’t think it’s a matter of monetary policy. I don’t think monetary policy will make much of a difference on that matter.”
With supply shocks continually feeding their ugly heads, Gambles added, it will be difficult for central banks to maintain long-term curbs on inflation.
Gambles argues that the United States should instead consider boosting fiscal policy to tackle inflation.
“The US federal budget for fiscal year 2022 is $3 trillion on a lighter gross basis than in 2021. So, you know, we’ve got a big shortfall on the foundation. And, you know, probably very little monetary policy can do that,” he said.
Gambles said that adjusting monetary policy was the “wrong solution to the problem.”
Other “unconventional economists” – cited by Gambles in the interview – such as HSBC senior economic adviser Stephen King, have also provided analyzes that suggest it is not simply a shock. Supply and demand is the cause for inflation, which is the activity of both sides. of the equation.
Both the pandemic shutdowns, supply chain volatility and Russia-Ukraine wars, as well as the stimulus that governments pump into their economies and loose monetary policies, economists like King say lax, which contributed to inflation.
“Economically, the COVID-19 crisis is seen by many as primarily a demand challenge. Central banks have responded by offering very low interest rates and continued quantitative easing. , even as the government introduces massive fiscal stimulus measures. King said in a note earlier this year, mainly referring to the pandemic.
“In fact, COVID-19 has only had a demand-related, lock-related side effect in advanced economies.”
“The supply side effects have proven to be both large and much more persistent: markets are now less efficient, countries are economically disconnected, and workers are less likely to survive.” more marginally and in some cases, less willingly within the border. Loosening policy conditions when supply performance is greatly reduced is only likely to lead to inflation.”
Since supply cannot adequately cope with the increase in money circulating through economies like the United States, prices must rise, he added.
Still a popular antidote
However, raising interest rates remains a popular antidote to inflation.
But economists There is now concern that the use of interest rate hikes as a tool to tackle inflation could cause a recession.
Increasing interest rates makes it more expensive for companies to scale. As a result, that could lead to investment cuts, ultimately hurting jobs and jobs.
