Rate Hike May Not Work This Time

Is it possible the rate hike is not going to work on suppressing inflation this time?

I think it is a possibility. Here is my analysis. Inflation is a result of...

1. High exchange mass flow of currency units. (Not just flow rate. Not just the amount. Its mass flow includes both flow rate and amount.)

Do you think people are just spending money as they desire?

No. People are spending on what they absolutely need right now. Looking at the data of credit card usage and surprisingly slow iPhone sales, it’s pretty easy to get the conclusion that people are spending more on food, energy, consumables, and these absolute needs of their lives.

It’s not about desire. It’s more about basic needs. When things required more currency units and these are necessary, mass flows of currency unit exchange would be high.

2. Less SUPPLY than DEMAND. (Not just supply. Not just demand. It has to be supply < demand)

Especially energy. The green energy movement, supply chain restructuring, political lockdown in China, and manufacturing plant relocation are all factors causing distributed supply.

Now, what is FED doing? Hiking interest rate.

It made debt more costly. Discouraging companies on expansion leads to the same or reduced productivity. Supply drops.

Less expansion “sometimes” leads to less demand. Here is what Fed is hoping to achieve. Less demand and therefore less spending, and therefore less currency exchange, and therefore lower inflation.

However, if the spending are already mostly on the necessary goods and services like food and energy, how can the demand be significantly suppressed? You can choose not to eat steak but it is extremely difficult to eat less, use less heat, and consume less energy.

Rate hike is going to get less and less influential on inflation when living quality has dropped to rock bottom. Remember, 30 years ago, a carpenter can feed a family of 5 with his job and income. It requires almost 2 jobs per household to feed a family of 4 or even 3 now. The purchasing power of a job has been significantly reduced over time.

(This is also why the unemployment rate remains low. A growing number of people are doing more than one job now. )

Crashing the already low demand does not resolve the issue of an even lower supply. “Supply” is the issue, Stupid!

In conclusion, suppressing the demand via rate hikes is not going to work in fighting inflation this time. At least not as effective as it was in the past.