With inflation much higher than it has been in decades, it’s natural that people are looking for someone to blame. Real wages in advanced economies are going backwards, household budgets are under strain, and interest rates are rising fast. People want a scapegoat.Politicians and central bankers are logical choices. In the US, Joe Biden’s first act as president was to pump an additional US$1.
What is true is that when demand is incredibly strong prices tend to go up. After many years of sluggish demand, the pandemic led to an unusual confluence of massive government spending, historically low interest rates, a large reservoir of household savings, once in a half-century low unemployment, andWith those forces fuelling demand, of course prices are going to go up. Throw in supply chain disruptions and the Russian invasion of Ukraine and prices go up a lot.
Newly appoint Federal Trade Commission chairperson Lina Khan is a strong proponent. New Brandeisians think that when it comes to business, big is bad. Period. Think Walmart, Amazon, Google, Microsoft or Apple. Indeed, the academic article that catapulted Khan to prominence was called “Plenty of people make the same “big is bad” argument in Australia. The problem is, big is sometimes very good for consumers.
But thinking we can solve our inflation problems with price caps or newly aggressive competition policy is simply wrong. Inflation will subside as demand is moderated by higher interest rates, global supply chains get straightened out, and businesses in Australia and elsewhere expand supply in response to market forces.