![]() ![]() ![]() Sure enough, consumer inflation expectations are much higher than they were, although few expect the current rate to continue for long. By disturbing workers’ and businesses’ expectations of inflation, a one-off shock can push up wage demands, which push up prices as companies pass through the additional costs, back to wages, prices and so on. The danger to the Fed harks back to the 1970s. But they have gone on so long that it became untenable for the Fed to keep insisting that prices were going to come down by themselves. Widespread post-Covid supply problems are a big part of the reason inflation is so high, and the Fed initially did nothing because it thought they were “transitory.” Many of the problems pushing up prices are still transitory, to the extent that they will go away eventually as Covid retreats: shortages of microchips, clogged-up Chinese ports and sick workers, among other issues. The trouble is, the Fed’s just tried ignoring a one-off, to disastrous effect. These are one-offs, and while higher prices at the pump may be painful, raising interest rates wouldn’t help drill more oil, merely slow the economy and thus, demand for oil. ![]() Economically, central banks typically ignore what they call supply shocks, which a war-driven rise in oil prices would be. ![]()
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