International Economics: IB Economics

Jeffrey Frankel looks at the role of the government in tackling US inflation, noting that US inflation was unchanged at 3.2% last month, but also noting that gasoline prices fell by 5% last month. On that basis, he wonders whether the government's policymaking deserves praise.

Spoiler alert: I suspect most Year 13 Economics students could write this article. Frankel notes that given the cost-push nature of the inflation, supply-side improvements have reduced inflation, but that the Fed should get some praise for its early increases in interest rates which have probably helped damp down the demand-side causes of inflation. 

A relatively simple question to answer: US stimulus spending to cushion the effects of the pandemic. 

Inflation - according to Keynesians - has two causes: demand-pull, caused by higher levels of expenditure; cost-push, caused by higher costs. And the US currently has both.

Of course, monetarists would have a different view...

The OECD is forecasting higher inflation across the developed world, with the UK expected to have 3% inflation by the end of 2022, but falling inflation in a number of other economies. 

The causes? Self-evident to be honest - higher raw material costs, supply chain issues and higher levels of consumer demand all play a part and can be shown by elementary AD-AS analysis. 

A lovely article about the nature of monetary policy, which looks at the conduct of global central banks and also highlights the difference between demand-pull and cost-push inflation.

In essence, Philip Inman argues that current rhetoric about tightening monetary policy to tackle inflation has had, and will have, little effect upon it, in large part because inflation is driven by higher energy prices. 

The Turkish monetary authorities raised interest rates by 1% (or 100 basis points) and saw the currency fall in value by 6%. And President Erdogan's argument - that high interest rates have been the cause of inflation - seems somewhat detached from economic reality, with most people being of the view that interest rates are a powerful anti-inflationary tool, if the cause of inflation is demand-pull.

Of course, lowering rates, and the subsequent fall in the value of the currency, is likely to worsen the situation - imports will have become more expensive, and exporters will have less of an incentive to keep their costs in check too. It looks as though the government might have lost control of the economy.