Federal Reserve Misfires Against Inflation

The Federal Reserve is taking action against inflation, but it's targeting the wrong opponent. According to economist Daniel Lacalle, policymakers and Keynesian economists often mistake price shocks for inflation.

While oil prices have risen significantly, causing some prices to increase, a true monetary inflation occurs when there's an increase in the supply of money and credit. This type of inflation causes a general rise in prices across all sectors, not just a few individual items.

The Fed has hiked interest rates by a quarter point, but this move may have little impact on energy costs or government spending. Lacalle argues that this will only hurt small businesses and families, which rely heavily on loans and credit to operate.

On the other hand, some argue that the increasing money supply warrants higher interest rates. However, the Fed faces a Catch-22: if it raises rates too high, it may tip the economy into recession; but if it doesn't raise rates enough, inflation will continue unchecked.