First, let me preface this with the fact that I am not an economist. I am an avid armchair researcher who delves into topics like monetary policy and other facets of life that may affect or interest me.
Around the world, central banks are hiking interest rates. The United States recently saw interest rates increase by .75 basis points. Canada, Australia and New Zealand saw .50 basis point increases. With more increases planned for most countries, things will get worse before they get better.
In Australia, we keep being told that interest rates are increasing to combat inflation. We are also being told that inflation is homegrown and not imported.
Nobody is arguing that interest rates shouldn’t increase from their historic lows. However, more people should be disputing the reasons they are being given by the central bank when it comes to the reasons for inflation.
COVID-19 has had a well-documented effect on global supply chains. We saw shipping prices go through the roof as shipping containers started piling into the atmosphere at ports due to lockdowns and COVID-19 restrictions and the logistics built around these things.
Even after we saw pandemic-era restrictions and mandates start to lift, things still have not improved as much as you would think.
The war in Ukraine and $11 lettuces have highlighted that the just-in-time (JIT) supply chain model is flawed and broken. Despite being championed by the likes of Toyota and yielding great success, it comes at the cost of being vulnerable when one or more of those pieces fails (like a natural disaster, pandemic or conflict).
Take lettuce, for example. It’s not $11 because people rush out with their excess pandemic savings and splash big on lettuce instead of flat-screen TVs. Catastrophic widespread flooding that has been hammering many parts of Australia since early 2022 wiped out numerous crops. Similarly, other vegetables are also seeing sharp increases.
Central banks (the Reserve Bank of Australia included) are attempting to reduce demand for goods and services through aggressive rate increases to shock the economy and reduce the amount of money people have to spend. The flow-on effect is that businesses might shrink their workforce due to reduced spending, and you have a new problem.
Those increases will come at the cost of jeopardising the economy but not fixing the underlying issue.
Central banks are doing this because most of the tools in the monetary first aid kit are blunt. An interest rate increase is a hammer and blunt chisel, attacking from the bottom like a block of ice.
In their attempt to fight inflation, central banks will attack food, energy and fuel expenditures because it’s all they can do.
When you have people deciding between eating dinner and heating their house through a brutal winter, filling up their car so they can drive to work or going without basic human needs, you have a real crisis on your hands that interest rate rises will exacerbate not fix.
To return inflation to the targeted “normal” range, the supply of goods and services needs to return to normal to avoid a recession. And right now, all signs point to a recession in Australia and other developed nations as no end is in sight for the global economies’ supply problems.
The question posed in the title has an answer: because we can’t.
Driven by decisions made during the pandemic (loose and unchecked bipartisan economic policy) and the impact the pandemic had on supply chains and the Ukraine war, there is no simple fix.
