As soon as we talk about inflation, the unique and the only thought of these economists (and of certain bankers and stockbrokers) is to look at the side of the central bank to know when it will start to play with the rates of interest. We make calculations, we draw cards. Will it be half a percentage point, a quarter, three quarters, a point?
We certainly assume that this inflation comes from the pressures of demand… and that the rise in interest rates will therefore curb this demand.
But if the inflationary pressures came from the dysfunctions of the offer? Several factors may be involved: supply problems due to the lack of manpower for production and handling, a scarcity of containers and container ships, poor harvests, a lack of rare metals or a shortage of microchips, for example. Not to mention contingencies such as outbreaks of swine or avian flu or strikes in the food sector. Why not also unreasonable decisions by OPEC (Organization of the Petroleum Exporting Countries)?
How can rising interest rates solve these problems? On the contrary, some of these could no doubt be addressed by investments in supply automation systems and other targeted investments. However, the rise in interest rates does not encourage investment, of any kind.
For the consumer, the rise in interest rates comes very late as a signal of inflation. This consumer has been aware of this for a long time now through his wallet. A kilo of ground beef, which last year sold for $7, is now down to $12, while $5 Sunday chicken now costs $10. When Quebec apples are close to the dollar per unit, consumers have already stopped buying them for quite some time or, at least, decided to buy less of them.
We don’t need the signal of rising interest rates to realize that there is something wrong with our finances. The rise in the interest rate does not really curb future demand, which is already much reduced, but above all penalizes past demand by applying to all debt vehicles: lines of credit, variable rate mortgages, cards credit. Consequently, it makes it possible to significantly increase the profit of lenders, banks and credit organizations…
When it is clear that inflation comes from supply-side dysfunctions, it is the elements of this problem that must be tackled. And, in the meantime, price controls or other measures must be introduced to at least curb abuses. When will there be an oligopsony from non-producing countries to deal with the inopportune decisions of OPEC and the giants of the oil industry?
The interest rate mechanism as an instrument to control certain types of inflation is archaic and counterproductive. It is throwing us headlong into a recession. We are reproducing the fiasco of the early 1980s… We were then fighting with this interest rate policy against unreasonable decisions by OPEC. A range of tools must be developed to deal with these problems.