Interest Rate Hikes May Be Misguided, Experts Warn

Global monetary policymakers are being misguided in their efforts to combat inflation by raising interest rates, according to some experts. The ongoing Iran war has caused volatility in oil prices, leading many to believe that sustained 'tightening' is necessary to cool the economy.

However, the author of this article argues that high oil prices do not fuel true inflation. In fact, data shows that high oil prices drive substitution and dampen demand for luxury goods. The example cited is the US Consumer Price Index (CPI) inflation, which climbed from 2.4% annually in January to a high of 4.2% in May due to the Iran war.

But as soon as energy prices fell near pre-war levels and stayed there through August, US CPI slowed to 3.4% year-on-year in July. This trend holds across Europe and Asia. The author believes that central bankers should stop focusing on commodity markets and start looking inward at the money supply.

The author notes that the extreme inflation in 2022 was not caused by Covid or high oil prices, but rather by central banks massively increasing the quantity of money in reaction to Covid - a move that Milton Friedman taught would lead to inflation. The author argues that rate increases are unnecessary and could harm the global economy.