by What to do about the present inflation To be sure, some normalization of interest rates would be a good thing. Interest rates are supposed to reflect the scarcity of capital, and the “correct” price of capital obviously is not zero or negative – as near-zero interest rates and very negative real (inflation-adjusted) interest rates would seem to imply. But there are substantial dangers in pushing rates too high, too fast. For example, it is important to recognize that US wage growth has slowed sharply, from an annualized rate of over 6% in the fall of 2021 to just 4.4% in the most recent period … So much for the “wage-price spiral” that previously had everyone scared and fueled demands for rapid monetary-policy tightening. Itis also important to recognize
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Lars Pålsson Syll considers the following as important: Economics
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What to do about the present inflation
To be sure, some normalization of interest rates would be a good thing. Interest rates are supposed to reflect the scarcity of capital, and the “correct” price of capital obviously is not zero or negative – as near-zero interest rates and very negative real (inflation-adjusted) interest rates would seem to imply. But there are substantial dangers in pushing rates too high, too fast.
For example, it is important to recognize that US wage growth has slowed sharply, from an annualized rate of over 6% in the fall of 2021 to just 4.4% in the most recent period … So much for the “wage-price spiral” that previously had everyone scared and fueled demands for rapid monetary-policy tightening.
Itis also important to recognize that this development runs completely counter to the standard Phillips curve models, which assume an inverse relationship between inflation and unemployment over the short term. The slowing of wage growth has occurred at a time when the unemployment rate is under 4% – a level below anyone’s estimates of the “non-accelerating inflation rate of unemployment.” This phenomenon may owe something to the much lower level of unionization and worker power in today’s economy; but whatever the reason, the sharp slowdown in wage growth indicates that policymakers should think twice before generating further increases in unemployment to tame inflation …
Most importantly, we need to help those at the bottom and middle cope with the consequences of inflation. Because the US is close to being energy independent, the country as a whole is relatively unaffected by changing energy prices (gains to exporters are simply offset by importers’ losses). But there is a huge distribution problem. Oil and gas companies are raking in windfall gains while ordinary citizens struggle to make ends meet. An “inflation rebate,” financed by a windfall-profits tax on fossil-fuel corporations, would efficiently address these inequities.