The last time inflation was really high was back in the late 70s and early 80s. At that time, Paul Volcker was the chairman of the Federal Reserve– which is like the bank of all banks – it sets monetary policies to help control the flow of money between banks. One of the ways it does that is by setting interest rates. When it comes to borrowing money an interest rate is what the bank charges you to take out a loan. The higher the interest rate, the more money you’ll pay the bank. So back in the late 70s when inflation was really high the Federal Reserve decided to raise interest rates a ton– up to 20%. The thinking was that inflation was really bad because there was too much money floating around, so raising interest rates makes it harder to access money. And this did bring inflation under control BUT it caused unemployment to surge and led to a big recession.
Why does increasing the interest rate control inflation?
Generally speaking, when interest rates increase, it makes it more expensive for consumers to take out loans to buy things, and it makes it more expensive for businesses to invest in things necessary to run their business. So companies do less business, they lay off workers, people lose their jobs, spending goes down and unemployment increases. Since people are buying less– prices drop and inflation goes down. Economists also say that rising interest rates that much that quickly also sent a strong signal to businesses that the Fed wasn’t going to allow inflation to get out of control. If businesses think that inflation will keep going up, they’re likely to raise their prices in anticipation of keeping up with the higher cost of living.
What are some long-term ways to control inflation?
There are a variety of long-term ways to control inflation in the future. One is ending our dependence on fossil fuels since they tend to contribute a lot to overall inflation. Green and renewable energy prices are more stable and aren’t dictated by the global oil market which can be very volatile. Other solutions include bringing back more manufacturing to the US to help alleviate some of the supply chain bottlenecks caused by covid shutdowns in factories abroad and reduced shipping schedules. Housing is also a contributor to inflation so adopting policies that allow for more affordable housing can help with inflation in the long run. Breaking up monopolies and mega-corporations could also help control inflation in the long run. When markets are dominated by a few players, it’s easier for businesses to get away with raising prices because they don’t have as many competitors keeping the prices in check.
SOURCES:
The Great Inflation
This essay from the Federal Reserve history site talks about the Great Inflation that spanned the 1970s.
Other People’s Blood (N+1)
This article from the N+1 literary magazine talked about Paul Volcker, his career and his role in curbing inflation.
Powell Says the Fed Will Not Hesitate to Keep Raising Interest Rates Until Inflation Comes Down (CNBC)
This article and video from CNBC discuss the federal reserve’s plan to raise interest rates to curb inflation.
Inflation Hurts. Raising Interest Rates Does Too (CNN)
This article from CNN explains how inflation and rising interest rates both have a negative impact on the economy.
Best Way to Fight Inflation: Ditch Fossil Fuels (New Republic)
This article from The New Republic unpacks the role of fossil fuels in rising inflation.
Why Corporations Are Reaping Record Profits with Inflation on the Rise (PBS NewsHour):
This video segment from PBS NewsHour discusses how companies are benefiting from rising inflation.
Competition Will Stop Inflation (The Hill)
This article from The Hill talks about how increasing competition among companies will help bring down inflation.