galbraith21_SAUL LOEBAFP via Getty Images_USgasstation Saul Loeb/AFP via Getty Images

Rate Hikes Are Not the Right Answer to “Wage-Price Persistence”

Headlines about high inflation continue to feed into commentaries demanding that the US Federal Reserve increase interest rates to curtail demand. Yet not only would this approach benefit money-holders at the expense of many workers, businesses, and consumers; it also is not even the best way to contain rising prices.

TOWNSHEND, VERMONT – It is a bit jarring when a secure and comfortable professor writes that others must lose their jobs so that inflation can be contained. And it is even worse if he explains that “the only solution … is to restrain demand” through higher interest rates – a very good solution for those with cash on hand. But let me reply on the merits to Jason Furman’s recent call for this “solution.”

Furman writes that in the United States, “Aside from food and energy price increases, the bulk of the inflation was originally caused by demand.” The words “aside from” are key. Over the 12 months through June 2022, energy prices are up 40% – with gasoline up 60% and fuel oil up almost 100% – and food prices have risen 10%. Prices of everything else have risen just 5.9%, and one must allow that energy prices affect the price of everything else. Furman’s claim recalls the old gag: “Aside from that, Mrs. Lincoln, how was the play?”

There is no actual evidence that demand, rather than cost, caused the non-energy, non-food price increases – and there are good reasons to be skeptical. Costs are wages and raw materials plus profits; they are paid for by sales, also known as demand. Thus demand and cost are nearly inseparable; they are opposite sides of the same economic accounts. Furman himself has written that “the exact combination ... is unknowable.”

To continue reading, register now.

As a registered user, you can enjoy more PS content every month – for free.

Register

or

Subscribe now for unlimited access to everything PS has to offer.

https://prosyn.org/PA8xNuz