[OC] Inflation rate and nominal interest rateSubmitted by giteam t3_y9padn in dataisbeautiful
hacksoncode t1_it7p9y1 wrote
Reply to comment by LeroyoJenkins in [OC] Inflation rate and nominal interest rate by giteam
> High interested rates fix inflation,
Only if the reason for the inflation is too much economic activity, rather than too little.
I.e. if demand is the primary problem rather than supply. Hint: today the problem is supply, not demand, and we need more industrial activity rather than less.
While it's not likely, "stagflation" is an incredibly ugly word.
LeroyoJenkins t1_it7q3o3 wrote
No, even if supply is the problem, high interest rates will decrease consumption and eventually bring it to the level of supply.
Naturally, that might also cause a decrease in the economic activity causing a recession.
The problem is that fixing inflation hurts, and people tend to have an aversion to pain, and to politicians who cause it.
And none of that matters to my point: inflation is backwards looking, target interest rates are forward looking. The rest is pedantism.
Anyway, no point in arguing economics on Reddit...
kawhi_2020 t1_it7tbl2 wrote
What do you mean "might"? Lowering consumption is lowering economic activity.
That is the point.
LeroyoJenkins t1_it7w2oj wrote
Might is referring to the recession. Depending on the circumstances, you might just slow the growth of consumption allowing supply to catch up, without causing a recession.
It all depends on how drastic things are and what is the roadblock.
[deleted] t1_it7r3ss wrote
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jacobobb t1_it7vafu wrote
That's just another way of saying demand is too high. The reason demand is higher than supply is irrelevant. Higher interest rates curb consumption, full stop. Now, there may be issues on the supply side simultaneously that need addressing, but that's a productivity problem, not a demand problem.
hacksoncode t1_it7w6tz wrote
> Higher interest rates curb consumption, full stop.
Higher interest rates curb all economic activity, both supply and demand.
Effectively, they are an attempt to create a recession... which is fine if the problem is everything is in a bubble that needs a correction...
But in conditions where the inflation is primarily due to supply shocks for reasons external to basic economics, like now, and like Japan because of their demographic collapse, there's a serious risk of creating stagflation, which is strictly worse than inflation.
AftyOfTheUK t1_it7zi8u wrote
>Higher interest rates curb all economic activity, both supply and demand.
But not equally, which is the vital missing link here.
Activities that are currently highly profitable will continue and possibly even grow, despite the higher interest rates.
However, activities which are unprofitable, or who have a long horizon to their ROI break even point will be affected, and will shrink.
That's the whole point. We don't want to curb EVERYTYHING, and we won't. We will leave the important, valuable, today stuff going... but we will lose the less important, less valuable and/or tomorrow stuff.
jffrybt t1_it7x2z3 wrote
> Today the problem is supply, not demand.
It is impossible to say this. Demand continues to outpace supply.
Did demand rise? Yes. Did supply drop? Yes. They are out of equilibrium. There is only one equilibrium created by both.
If there were fewer job openings than job seekers, I would agree that you could look to supply to fix it.
But more job openings than job seekers shows that the supply side sees unmet demand, is trying to meet it, but will not be able to catch up to demand. They cannot employ enough people to keep up with demand.
How can you have an economy that has more consumers than producers? You can’t. The result: inflation.
So in that sense, the demand side is the one that needs to addressed.
hacksoncode t1_it7y3oi wrote
> If there were fewer job openings than job seekers
At current offered wages. The only way to fix that, ironically, is inflation.
>They cannot employ enough people to keep up with demand.
Not because those people don't exist, presently (as in Japan's case), but because of external factors.
But even if they didn't exist, though, the only answer other than "everyone just suffers" would be more automation... which requires... capital that high interest rates make scarce.
jffrybt t1_it82ube wrote
Automation is its own supply and demand and growth limitations. You could flood it with capital, but if every company seeks to increase automation simultaneously, you won’t see an actual increase in automation. You’ll see an increase in the price of automation and an increase in job listings in automation.
Exact same position we are in.
Supply building is slow.
Demand is now.
And you can bet your ass companies are building automation. Long term job destruction is happening behind all of this.
Orangeflea215 t1_it80pad wrote
Do you have a source? has production, or consumption, dropped in real terms since 2019 for instance?
raptorman556 t1_it80vm5 wrote
>Only if the reason for the inflation is too much economic activity, rather than too little.
Inflation is caused by a mismatch in aggregate supply and aggregate demand. Interest rates can even be somewhat effective in the case of a supply shock—whether or not that's the tool you want to use depends on how long you expect the supply shock to last.
>Hint: today the problem is supply, not demand
The data indicates this is not the case—demand is a strong contributor to inflation and ignoring that will only cause us more problems.
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