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Authored by Frank Shostak via The Mises Institute,
On Wednesday, March 16, 2022, the US central bank, the Federal Reserve System, raised the target for the federal funds rate by 0.25 percent, to 0.50 percent. According to Fed officials, the increase in the federal funds rate target was in response to the strong increases in the yearly growth rate of the Consumer Price Index (CPI), which stood at 7.9 percent in February against 7.5 percent in January and 1.7 percent in February of the year before. Most commentators believe that by raising the interest rate target, the central bank can slow the increase of prices of goods and services. Supporters of this strategy often refer to May 1981, when then Fed chairman Paul Volcker raised the fed funds rate target to 19 percent from 11.25 percent in May 1980. The yearly growth rate in the CPI, which stood at 14.8 percent in April 1980, fell to 1.1 percent by December 1986 (see chart).
Figure 1: CPI vs. Federal Funds Rate Source: Bloomberg
Note that commentators identify the growth rate in the CPI as inflation. We hold, however, that increases in money supply are what inflation is all about. Also, we do not say that inflation is caused by increases in money supply, as some commentators are suggesting. Instead, we hold that inflation is about increases in money supply.
The price of a good is the amount of money paid for it, but whenever there is an increase in the money injected into a particular goods market, this means that the price of the goods in money terms will rise. This increase in the price is not inflation, however, but rather the manifestation of inflation as a result of the increase in money supply, all other things being equal.
The damage […]
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