Your Inflation Questions Answered – The New York Times

Other more concerned commentators have drawn parallels between now and the 1970s, when the Fed was slow to raise rates as unemployment fell and prices rose — and inflation spiraled out of control. But many economists have argued that important differences separate this period from this one: workers were more heavily unionized and perhaps had more bargaining power to push for higher wages at the time, and the Fed has been slow to react for years. This time, he is already preparing to react.

Why is price control considered a highly disadvantaged response to inflation? —Jim Moher, San Leandro, Calif.

In the 1970s, President Richard Nixon attempted to control wages and prices—which capped wage increases—to control inflation. The freezes worked for a while, but prices soared when they were lifted, and they got bad press among economists. This reputation has haunted them ever since. We asked experts on price controls in a recent article, and a vocal minority thinks the experience of the 1970s has unfairly tarnished the idea and it might be worth reopening the debate.

“It’s a big suppressed topic,” said James K. Galbraith, an economist at the University of Texas. “It was absolutely common from the start of World War II until the Reagan administration.”

If inflation is caused by supply chain issues, how will raising interest rates help? —Larry Harris, Ventura, Calif.

Kristin J. Forbes, an economist at the Massachusetts Institute of Technology, said many of the current links between inflation and disrupted supply chains, which monetary policy can do little to fix.

But the trade is actually taking place at high levels, even amid the disruptions. Factories produce, ships ship, and consumers buy fast. It’s just that the supply is not keeping up with this booming demand. Higher interest rates can relieve pressure on demand, making it more expensive to buy a boat or car, cooling the housing market and slowing business investment.

“A lot of supply chain issues you can’t do anything about,” Ms Forbes said. “But you can affect demand. And it is the combination of the two that determines inflation.

Comments are closed.