Inflation is causing real pain. But raising interest rates will make it worse | Isabella Weber and Mark Paul
Rate hikes could induce a recession and hurt ordinary people. We need price stabilisation measures instead
Today American policymakers face a stark choice. Either, they can fight inflation by continuing to hike interest rates to generate unemployment and bring down aggregate demand. Or, they can employ a surgical approach that reins in the price increases that have been driving inflation, while encouraging investments to overcome chronic supply chain issues.
The current inflation situation hasn't been about all goods in the economy getting more expensive at the same rate. Specific goods - food, fuel, cars and housing - have been experiencing massive price shocks, raising the general inflation level substantially. Controlling these changes would require aggregate demand to shrink to unbearable levels for average Americans - essentially making people too poor to buy goods, and thus alleviating bottlenecks. Rate hikes are not only ill suited to bring down these essential prices but risk a recession throwing millions out of work.
Mark Paul is an assistant professor at the Edward J Bloustein School of Planning and Public Policy at Rutgers University
Isabella Weber is an assistant professor of economics at the University of Massachusetts Amherst and the author of How China Escaped Shock Therapy
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