Modern Economic Nonsense — What if the Fed gets inflation all wrong
There’s a lot of news about the Fed getting inflation wrong, but what if they really are wrong 😱? People should be asking themselves as the Fed begins its new meeting cycle. The central bank raised interest rates aggressively for the first time since 1994 and signaled more hikes could be coming soon. But that doesn’t mean we are set to see an end to high inflation. It just means that we need more aggressive policy measures to help bring it down again. Why are higher prices such a big deal? A strong economy runs on capital; businesses require money to grow, and consumers spend money to spur demand. So why do we struggle so hard to keep our costs under control this time?
Why do we struggle to keep our costs under control? Lower inflation means more money for investors
Inflation is essentially how central banks try to keep the cost of living down. If the cost of an item goes up, then your money is worth less. But if it goes down, then it’s worth more. But inflation is a double-edged sword. When it’s too high, it essentially means that you’re losing money. And when spending is high, it erodes the real value of savings and makes debt repayment more difficult. So when we have low inflation, and people can actually see the value of their savings go down, we tend to rein it in and rein it in quickly.
Robust economy means robust spending
When people have more money in their pockets, it spurs demand. When everyone spends money, more businesses are created. There’s an economic boost to the whole thing. Inflation also affects spending because the purchasing power of your money goes down when inflation goes up. So while the $5 bill may have seemed like a lot of money when you first got it, by the time you’ve got a family to feed with it, it’s not worth much at all.