Like others, I have been reading and experiencing about inflation. It seems like everything but GPU graphics cards are going up. Everything from prices at the pump, grocery shopping, and eating out are all going up. In short, these are the commodities that are needed to sustain life.
Normal people do not stock up on extra food and gasoline, not in huge supplies any ways. Most of us typically buy and use them as we need them. Therefore, price increases in these categories of goods are most likely caused by supply constraints and not by excess demand.
When central banks around the world sees high inflation rates, their immediate monetary policy change is to increase interest rates. This increases the cost of borrowing and impacts on cash flow. For example, you tend to use your credit card less and therefore you end up buying less. There will also be less investments and ventures. People will tend to save more.
If the current inflation is a result of supply constraints of key commodities necessary to sustain our current way of life, then a forced demand reduction means a pare back to our quality of life. The increased interest rate will have a dampening effect on items other than food and energy, at least not immediately.
It will eventually reduce demand on the essentials when people are indirectly impacted through layoffs due to lower business activities in other areas. This means people will have to buy less food and consume less energy. A lower quality of life.
Okay. Why raise interest rates then if it is going to do more damage than good? Unfortunately interest rate is the only main lever that central banks have. Interest rates will have to increase to the point where demand of the essentials are align back to their corresponding supply levels. This means to fight this type of inflation, we will necessarily see a recession in the economy and our livelihood.
The alternative is to allow for inflation rate to go uncheck and await for supply to naturally fix itself. I do not think this will work as high inflation effectively act as a brake to economic growth for everyone. The central banks now face a difficult decision. Let inflation create hardship for all or raise interest rates to cause pain for some (less than all), and reduce demand on the essentials. I fear they will have no choice but to choose the latter. As a result of this choice there will be a further widening of our social class gap. The rich will be more prepared to weather through the increase in borrowing costs. They may even seek opportunities to increase their social status. The poor will have to deal with making ends meet with less necessities.
In short, things will get much worst before they get better. When inflation is tamed, and I think this will be some time considering the current Ukrainian war, sanctions, and logistical issues, the poor will be less well off than the rich in the next cycle.
Let me know your thoughts on my thoughts.