Outsized rate hikes could boost inflation rather than contain it, says Joseph Stiglitz

Economics Nobel laureate Joseph Stiglitz says central banks are raising borrowing costs too aggressively to tame supply-side inflation, exacerbating gains.

As activities resume after pandemic lockdowns and countries like China struggle to restore normalcy, the global economy is suffering something “we’ve never done before,” the Columbia University professor said in an interview in Lindau, Germany.

“Raising interest rates will not solve supply-side problems,” he said. “It may make it even worse because what we want to do now is invest more in the supply-side constraint, but the hike in interest rates is making those investments harder to make.”

Policymakers are counting on tighter monetary policy to rein in the fastest inflation in a generation and keep expectations about future price developments in check. Mr. Stiglitz is not so sure about that.

As the US economy and others show clear signs of “market power” — where companies can raise prices without losing business — standard economic models suggest that rate hikes can lead to even more inflation, he said.

He pointed to the US housing market, where there is evidence that landlords are passing higher interest costs through rents to tenants, fueling price growth.

“How will rate hikes lead to more food and energy and solve the chip supply problem? Not at all,” Stiglitz said. “You’re not going to address the root cause of the problem — and the real risk is that it makes things worse.”

Meanwhile, economics Nobel laureate Richard Thaler has warned that concerns that rising inflation will be self-fulfilling may give too much weight to financial market prices and not enough to households’ relatively dovish views.

While consumers are certainly feeling the impact of high prices, there is little sign that they expect further strong gains or compensate for such a scenario in wage negotiations, he said in an interview in Lindau, Germany.

“There’s a lot of discussion among economists about inflation expectations, and I say: Whose?” said Mr. Thaler. “We have central bankers, we have bond dealers, we have the financial sector in general, and we have employers and employees.”

While wages have skyrocketed in sectors plagued by staff shortages, such as travel, increases elsewhere have been more muted, the behavioral economics expert said.

“I don’t see a lot of pressure on wages in sectors where they don’t make an effort to get people to work,” he said.

With soaring energy costs driving much of the world’s inflation, many central banks’ steep hikes in interest rates are aimed more at making sure people don’t expect prices to keep rising.

Mr Thaler said the lack of strong, across-the-board wage increases so far could be explained by workers not knowing “if this is going to last” or what would happen if there were positive developments in major global crises like Russia’s invasion of Ukraine.

“If the war ends and Covid stops in China, I think we could have deflation,” he said. “Certainly, the price of natural gas is artificially high. And the price of chips is high because China doesn’t produce enough of them and there are supply problems.”

https://www.independent.ie/business/world/oversized-rate-hikes-risk-driving-inflation-higher-instead-of-reining-it-in-says-joseph-stiglitz-41935259.html Outsized rate hikes could boost inflation rather than contain it, says Joseph Stiglitz

Fry Electronics Team

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