The Fed raised rates another 75 basis points. The theory is that raising rates will slow economic growth. Slow growth will lower inflation. But history tells us, we should be sceptical.
We have seen interest rates soaring to 18% before all was done and dusted. At the moment we are at 3%. So, still a few miles to walk.
Inflation is sometimes harder to control than by just increasing interest rates. There are processes that take place when inflation starts up. Just take the wage-price spiral, for example, something that we see right now. Prices of goods, services and rents go up. So, people demand a salary increase in order to being able to afford and to cover their living cost. But this adds more pressure on companies to hike prices of goods and services. Prices go up again and people demand more money all over again. the classic wage-price spiral.
We have seen it all back in the early 70s, when the Arab-Israeli War led to the Arab oil embargo created a major shock to the system. Fuel prices around the world multiplied in a matter of months. This led to inflation and economic stagnation: Stagflation! The worst scenario of them all.
And it was not over in a year or two. It took an entire decade. When stagflation arrives and at the moment it looks like it times could certainly get a lot tougher.
Sven Franssen