US inflation is mainly supply-side driven so further rate hikes will have little to no effect – and cause deep problems of their own
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.
Policymakers continue to balance the risk of doing too little against doing too much. The risks of increasing interest rates are clear: a fragile global economy could be pushed into recession, precipitating more debt crises as many heavily indebted emerging and developing economies face the triple whammy of a strong dollar, lower export revenues, and higher interest rates. This would be a travesty.
Moreover, many price-setters in the housing market may now pass the higher costs of doing business on to renters. And in retail and other markets more broadly, higher interest rates can actually induce price increases as the higher interest rates induce businesses to write down the future value of lost customers relative to the benefits today of higher prices.
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