0
$\begingroup$

Is covid the reason for inflation? Is jerome powell correct with the interest rates? Can inflation be curved quicker or is this a normal rate?

$\endgroup$
1
  • 1
    $\begingroup$ Voting to close, please ask separate questions separately. $\endgroup$
    – Giskard
    Commented May 4 at 6:35

1 Answer 1

0
$\begingroup$

Inflation has come off the back of a decade of loose monetary policies in the aftermath of the 2008 GFC. The combination of expansive monetary and fiscal measures, adopted at the start of the Covid-19 pandemic and the global economic shutdown, have led to increased pressure on price triggered by demand pull factors. The economic shutdown also led to a tightening in industrial and wholesale productivity levels resulting in contraction in supply triggering cost push inflation. The breakdown in supply chain due to production disruptions and shipping constraints have added on pressure on supply. The rising prices in the US mostly result from the long run impacts of market forces of demand and supply. There has also been some systemic shift in pricing mechanism due to an absence of regulation across some markets. Inflation has also been exacerbated as a result of ongoing growing geopolitical tensions and international trade woes.

With regards to the Federal Reserve Bank contractionary monetary intervention, the aim is to indeed promote price stability and hence bring inflation within the 2% target. Inflation is a measure of price level movement from 1 year to another. Hence, the focus is really on the annual improvement in getting prices down. The rate hikes aimed to also support the USD to avoid unnecessary depreciation that would bring additional inflation in the country through costly dollar denominated imports. The role of the Federal Reserve Bank is also to promote full employment and economkc prosperity. Hence, there is a fine line that the Federal Reserve Bank does not want to cross through its contractionary monetary intervention to avoif causing too much economic pain. In short, the current interest rate policy along with the balance sheet reducing program (Quantitative Contril) are playing a key role in bringing inflation under control.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.