“The impact of a rise in interest rates on inflation could be much weaker than expected”
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De the annual meeting of central bankers in Jackson Holein the United States, on August 25, the commentators retained two important information.
The first is that the central banks of the industrialized countries – the American Federal Reserve (Fed) in the lead – are ready to raise their key rates vigorously to stop the inflationary spiral nascent, even if it means sacrificing economic growth.
The second is the signal effect supposed to give credibility to these announcements: Jerome Powell, the chairman of the Fed, warned that households and businesses would suffer from the recession induced by the rise in rates.
A false assumption
This narrative, relayed extensively in the media, assumes that tightening monetary policy is the appropriate approach to bring inflation down to low levels. However, it is based on a false assumption, namely that current inflation is mainly due to demand factors.
In the United States, these only explain at most a third of inflation (“How Much Does Supply and Demand Drive Inflation?” », Adam Shapiro, Federal Reserve Bank of San Francisco, June 21, 2022).
Although he does not have similar studies for the euro zone, the chief economist of the European Central Bank (ECB), Philip Lane, identified, in a speech delivered in Brussels in May for the Bruegel think tank, the causes major factors in current inflation: the congestion of global value chains, geopolitical factors – including the war in Ukraine, the end of the containment policies implemented to fight against Covid-19 (“ The outlook for the euro area: some analytical considerations », Philip R. Lane, Brussels, May 5, 2022).
To understand current inflation, the monetarist theory is not the right reading key. It is rather the structure of production costs that governs inflation. For at least four decades, consumer price inflation has been correlated with changes in producer prices, which follow long cycles of ups and downs. These prices depend on four components:
A phenomenon of wage compression
– firstly, growth in nominal wages corrected for gains in labor productivity;
– second, the change in the interest rate corrected for the growth in capital productivity;
– third, the trend in the cost of imports;
– fourth, the evolution of indirect taxes.
Since 1980, and until very recently, the industrialized countries have evolved in a downward inflation regime which then stabilized at low levels, in direct connection with the evolution of these four components.
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