Home » Decline in inflation is thanks to the Fed and ECB, says economist

Decline in inflation is thanks to the Fed and ECB, says economist

by admin
Decline in inflation is thanks to the Fed and ECB, says economist

US-Notenbank-Chef Jerome Powell.

Kevin Dietsch/Getty Images

Inflation in the USA and Europe is falling. At the same time, the debate is flaring up again among economists about what triggered the historic wave of inflation and what contributed to its end.

The decline in inflation is thanks to central banks and their aggressive interest rate increases, writes US economist William Salter. The role of delivery bottlenecks, however, is overestimated.

Inflation in the USA was mainly triggered by high government spending programs. The Fed’s interest rate increases would have slowed demand and thus inflation.

Inflation is easing. In December, special effects caused prices in Germany and Europe to rise somewhat more sharply. But economists expect inflation rates to continue to fall and move closer to the central banks’ two percent target. On the other hand, the controversy among economists continues as to what triggered this historic wave of inflation and contributed to its end? Were there factors on the supply side such as the disruption of supply chains as a result of Corona and the war in Ukraine? Or have the sharp expansion of the money supply and government spending fueled inflation? The economist William Salter from American Institute of Economic Research.

The influence of supply chains and problems on the supply side is overestimated. The decline in inflation is primarily due to central banks such as the US Fed, which have curbed demand with their aggressive interest rate increases, writes Salter in his essay.

He contradicts economists who were of the opinion that the decline in inflation was primarily due to the fact that supply chains were put back in order after the corona pandemic and companies had built up increasing inventories. This interpretation was supported by, among others, USTreasury Secretary Janet Yellen representedn. That too Roosevelt-Institut had argued that the fall in inflation was due to an expansion in supply.

See also  The arguments for a change in interest rates are becoming stronger

“There is a big hole in this theory: it makes predictions that clearly do not match the data,” argues Salter: “While improved production conditions can sometimes cause prices to rise more slowly or even fall, they are not the main reason for this current slowdown in inflation.”

“>

External content not available

Your privacy settings prevent the loading and display of all external content (e.g. graphics, tables, subscription login) and social networks (e.g. Youtube, Twitter, Facebook, Instagram etc.). To display this, please activate the settings in the privacy settings.

Change privacy settings

If supply constraints drive up prices, removing them should have the opposite effect, Salter said. But since the end of the corona pandemic, goods prices have continued to rise, although transport and energy costs have fallen.

The relationship is symmetrical, Salter explained: a one percent increase in total supply should have reduced the inflation rate by one percent. However, the growth of the gross domestic product as a measure of supply does not show that this is the case.

The decline in inflation of more than five percentage points in the third quarter cannot be explained by a 1.2 percentage point increase in real GDP growth, said Salter. The “improvements on the supply side would have to be about four times as large for the explanation to work.”

Salter explains rising post-pandemic inflation more as a result of the sharp increase in government spending during the COVID period, when politicians expanded programs to support households and consumers.

The subsequent decline in inflation was the work of the Fed and demonstrated the effectiveness of the 5.25 percentage point interest rate hike within 16 months, said Salter. Combined with central bank balance sheet contraction, higher interest rates helped reduce the money supply. This severely slowed down overall economic demand – and thus price increases.

See also  That's why Bezos and Zuckerberg are selling billions of dollars in shares

“>

External content not available

Your privacy settings prevent the loading and display of all external content (e.g. graphics, tables, subscription login) and social networks (e.g. Youtube, Twitter, Facebook, Instagram etc.). To display this, please activate the settings in the privacy settings.

Change privacy settings

“Our inflationary roller coaster validates the macroeconomics textbook we have taught our students since the early 1980s,” Salter wrote. “The link between aggregate demand growth and inflation remains strong.”

But the controversy is likely to continue. Another investigation recently found evidence that supply chain problems are more persistent than previously thought may have played a larger role in the price increasesthan even the proponents of supply theory had previously suspected.

External content not available

Your privacy settings prevent the loading and display of all external content (e.g. graphics, tables, subscription login) and social networks (e.g. Youtube, Twitter, Facebook, Instagram etc.). To display this, please activate the settings in the privacy settings.

Change privacy settings

Read too

Inflation rises to 3.7 percent in December – but economists expect prices to ease significantly in 2024

You may also like

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More

Privacy & Cookies Policy