A Balanced Response to Inflation

NEW YORK – Although some supply shortages were anticipated as the global economy reopened after the COVID-19 lockdowns, they have proved more pervasive, and less transitory, than had been hoped. In a market economy that is governed at least in part by the laws of supply and demand, one expects shortages to be reflected in prices. And when individual price increases are lumped together, we call that inflation, which is now at levels not seen for many years.

Nonetheless, my biggest concern is that central banks will overreact, raising interest rates excessively and hampering the nascent recovery. As always, those at the bottom of the income scale would suffer the most in this scenario.

Several things stand out in the latest data. First, the inflation rate has been volatile. Last month, the media made a big deal out of the 7% annual inflation rate in the United States, while failing to note that the December rate was little more than half that of the October rate. With no evidence of spiraling inflation, market expectations – reflected in the difference in returns on inflation-indexed and non-inflation-indexed bonds – have been duly muted.

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Last Mile Source

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