The Fed Rate Hike Card Alone Won’t Catch on US Inflation

Comprehensive measures such as labor market changes and energy measures are needed

Critics say that the Fed rate hike card alone is not enough to successfully curb inflation. There are concerns that an aggressive rate hike alone will not catch inflation and will only lead to a recession. It is pointed out that various measures such as labor market flexibilization and oil price stabilization measures should be taken concurrently with the rate hike.

The Wall Street Journal (WSJ) reported on the 24th (local time) that the Fed’s war on inflation alone could only pose a risk of a recession.

This is the worst inflation for the US in 40 years. The US consumer price index (CPI) in June recorded 9.1%, the highest since January 1982. It is reaching a monthly high, exceeding the market’s expectation (8.8%).

Comprehensive measures are needed, from the job market to Corona measures

Interest rate hikes reduce investment and employment, and can have an effect on easing inflation. However, the prevailing analysis is that the current inflation is different from normal high prices. The root cause is supply chain disruption caused by the Russia-Ukraine war and China’s containment policy. That’s why the WSJ points out that “a rise in interest rates will not solve a supply chain bottleneck or increase oil production“.

Experts agree that a trick to alleviate the supply shortage is absolutely necessary. Particular attention is paid to the work force market. The U.S. labor market is currently at its most robust in history, but companies are complaining of a manpower shortage. The labor shortage pushes up wages, and as companies reflect labor costs in commodity prices, it ultimately fuels inflation.

Pinelope Kouzianu Goldberg, a professor of economics at Yale University, argued for a change in the labor force participation rate in Project Syndicate, a contributing journal. The advice is to significantly increase the number of people participating in economic activities. In fact, the current US labor market is called the ‘Great Resignation’. This is because the number of people who quit their jobs increased as the government released a lot of subsidies to revitalize the economy during the corona pandemic.

Professor Goldberg said that in order to solve the labor shortage, the government should come up with measures such as opening the door to more legal immigration or devising policies that increase labor force participation.

He also emphasized, “The time has come to abandon the rule that workers must rest for a few days even if they are asymptomatic if they test positive for the coronavirus,” he said.

“Inflation cannot be overcome without efforts to catch oil prices”

Energy price stability is also urgent. The current inflation is largely due to high oil prices. In last month’s CPI alone, the core CPI excluding energy and food, which has high price volatility, stood at 5.9%, the lowest level since the Russian-Ukraine war. Energy and food prices can be seen as the main causes of historical inflation.

Commodity prices fell last month as investors feared a global recession, but the risk of a surge in oil prices remains. Analysts at Goldman Sachs predicted that oil prices would surge again later this year, not only because crude inventories are at an all-time low, but also because oil-producing countries are unlikely to increase production further.

Empoli America, a policy group, advised that the government should seek to stabilize oil prices through the right to exchange oil reserves. In the case of the release of stockpiled oil through the exchange method, it is explained that refiners who received the stockpiled oil must return it to the government in the form of crude oil in the future, so they can actively invest in production facilities without fear of economic recession or falling oil prices.

Reducing the price of raw materials through the abolition of regulatory policies can also be an alternative. Energy economist Philip Berrager said that lifting the regulations that reduced the sulfur content of marine fuels that came into effect two years ago could moderate the rise in diesel prices. “Environmental groups will oppose it, but lifting the regulation could lower diesel fuel prices,” he said. However, the WSJ reported that this alternative was not realistic because it was in conflict with the climate crisis-focused project promoted by US President Joe Biden