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Central banks are stubbornly increasing rates to fight current spike of inflation. Inflation, especially in Europe but also in the USA, is mainly supply driven and, killing demand to try to tame an increase in prices which derives mainly from the increase in energy prices doesn’t look very efficient. The risk is a dramatic slow down in economic activities, especially in Europe, but still central bankers don’t appear to care about that. Supply inflation, something they can do very little about, is their main concern. Should they revise their rate increase policy or is there no other way out of this mess?

user067531
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  • The premise of supply inflation is quite hard to establish as it is really the case of a mix between them. See for example this paper by Adam Shapiro (though I'm not fan of the methodology). it shows that this is a real question what drives the inflation. But even if the inflation is 100% supply-driven, it does not mean that curbing demand not going to tame the inflation. the Fed seems to be fearing wage-spiral for some reason. – d_e Sep 27 '22 at 06:44
  • @d_e - well, the Fed has denied the danger of inflation till it was evident even to my grandma. Should we trust what they are doing now? – Gio Sep 27 '22 at 10:15
  • @Gio, It looks like my final sentence took a different interpretation. I said for some reason [hinting this is something I don't see], not for a reason. But I really don't know, and I admitted that even before the Fed's chairman who recently said: "I think we now understand better how little we understand about inflation" – d_e Sep 27 '22 at 12:02
  • Energy prices spiked as ever before and impacted prices all way down to final products and consumers. Not sure they need a degree to understand this. But they are trying to stop the price increase at production and consumer levels..while the heart of the problem is uphill. The final result will be recession. And new money printing.’ – Gio Sep 27 '22 at 12:06
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    @Gio, I'm clearly not going to defend to Fed, and to me it seems their very aggressive action that results from focusing on few short term indicators will have adverse impact years to come. But It is just complex system: The Fed, so I understand, view recession as a lesser of two possible evil outcomes. – d_e Sep 27 '22 at 12:14
  • Reduced economic activity means less people buying stuff which means prices go down. – user253751 Sep 27 '22 at 15:23
  • @user253751 - that’s how demand inflation normally behaves. Supply inflation is a different story. – Gio Sep 27 '22 at 18:34
  • @Gio is it though? In both cases the problem is there's more demand than supply. – user253751 Sep 27 '22 at 18:34
  • @user253751 - no sorry. The issue is that supply prices spiked sky high, and not for demand excess but for different reasons (Essentially price manipulation for geopolitical reasons) – Gio Sep 27 '22 at 18:37
  • @Gio Price is the intersection of supply and demand curves. Why do you think the supply curve is too low rather than the demand curve being too high? Does it make a difference? – user253751 Sep 27 '22 at 18:38
  • See natural gas prices in Europe for instance ..from 20 to 300 euros per mhw, in one year. No demand change, just geopolitical reasons – Gio Sep 27 '22 at 18:39
  • That’s supply inflation, and no rate increase can affect that, unless you kill the economy. – Gio Sep 27 '22 at 18:43
  • @Gio Killing the economy as in decreasing demand? Yes, that's the point. Supply will match demand at a lower price. – user253751 Sep 27 '22 at 18:49
  • Yes, that’s the wrong way to go. – Gio Sep 27 '22 at 19:02

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