> It isn’t clear that increasing interest rates will have any impact on lowering prices. The nascent resurgence in inflation being experienced across the world is primarily still due to supply chain disruptions. The mechanism by which rising interest rates are supposed to impact inflation is essentially by increasing unemployment, which weakens workers’ bargaining power and thus slows wage growth. But lowering wage growth won’t do anything to address supply side constraints or energy shortages, which are a driver of ‘cost-push’ rather than ‘demand-pull’ inflation.
> ...
> The trade-off for policy makers between creating jobs and wage growth, while simultaneously controlling inflation, goes back to a 1958 paper by economist William Phillips on the relationship between ‘Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957’, which became a cornerstone of macroeconomics. The paper identified the correlation between lower unemployment with higher inflation and vice-versa (see Figure 2).
The explanation for this relationship was that as unemployment decreased the ability of workers to bid for higher wages increased due to less competition in the labour market. Higher wages mean more income to spend on goods and services, which leads to prices going up. This is bad for net creditors and net savers, because the inflation cancels out the interest on savings. By contrast, workers and net borrowers benefit from rising wages and prices, as it allows them to pay off their debt more quickly, which is depreciating in real terms relative to their income.
Inflation is multifactorial, different types of disruption to the economic web cause different effects on it, the article then goes on to mention the overall lower wages on US and UK post Reagan Thatcher as case study for how labor and wage growth changes inflation rates
>...
> It isn’t clear that increasing interest rates will have any impact on lowering prices. The nascent resurgence in inflation being experienced across the world is primarily still due to supply chain disruptions. The mechanism by which rising interest rates are supposed to impact inflation is essentially by increasing unemployment, which weakens workers’ bargaining power and thus slows wage growth. But lowering wage growth won’t do anything to address supply side constraints or energy shortages, which are a driver of ‘cost-push’ rather than ‘demand-pull’ inflation.
> ...
> The trade-off for policy makers between creating jobs and wage growth, while simultaneously controlling inflation, goes back to a 1958 paper by economist William Phillips on the relationship between ‘Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957’, which became a cornerstone of macroeconomics. The paper identified the correlation between lower unemployment with higher inflation and vice-versa (see Figure 2).
The explanation for this relationship was that as unemployment decreased the ability of workers to bid for higher wages increased due to less competition in the labour market. Higher wages mean more income to spend on goods and services, which leads to prices going up. This is bad for net creditors and net savers, because the inflation cancels out the interest on savings. By contrast, workers and net borrowers benefit from rising wages and prices, as it allows them to pay off their debt more quickly, which is depreciating in real terms relative to their income.
https://tribunemag.co.uk/2021/11/bank-of-england-rishi-sunak...
Inflation is multifactorial, different types of disruption to the economic web cause different effects on it, the article then goes on to mention the overall lower wages on US and UK post Reagan Thatcher as case study for how labor and wage growth changes inflation rates