Many observers blame the ‘sticky’ services inflation on nominal wages, which are rising as workers strive to catch up with inflation.
the inflation is caused by people trying to catch up with the inflation?
It’s always the workers fault, not the actual price setters
Oh sure, that’s table stakes for capitalist economics opinions. What got me is the sheer concentrated circularity of that sentence.
It is not so simple….
The 5% interest rate actually resulted in huge interest income payment (est. $0.8-1T in 2023), and although much of the money went to the rich, clearly the money had been spent as well as consumption index did not continued to rise.
The problem? The US federal budget deficit was $1.7T last year, which means that nearly 50% of its deficit spending in 2023 was sustained by the interest payment from high interest rates. This means that if the US starts cutting rate, it’s going to end up with less income payment, less deficit, less money for consumption, and driving the economy into recession.
There is no easy way out. The monetary policy is in a quandary that has no solution. Keeping the rates high is a ticking time bomb for a financial crash (we don’t know when though, but the risk persists), but lowering the rates without also compensating for an increase in deficit spending through other means will also drive the economy into recession.
There is also another dimension that a lot of these analyses don’t take into account, which is the impact of high Fed rates on the rest of the world. The number of Global South countries under severe economic distress has gone way up since the US hikes its interest rates, compounded by Covid disruption immediately prior. Many countries are running out of dollars and they are looking for a way out, but since there hasn’t been any alternative (there is nothing coming out of the BRICS+ front), everyone still has to earn dollars to dig a way out.
So they will keep exporting to the US, as cheaply as possible, in hopes of surviving the next wave of economic hardship. In effect, the US gets to export its inflation to the rest of the world. And the prices are not really coming down domestically because of energy prices and monopolists wanting to rake in more profit by keeping their prices inflated.
The stress in the Global South is causing their governments to destabilize, the recent events in Kenya were a direct outgrowth of high interest rates. Eventually this situation will reach a point that these countries start to collapse or have their governments overthrown by anti-Western forces (like has happened in several ECOWAS countries)
This can’t continue forever.
