Saturday, March 11, 2023

Inflation of existing asset prices. One cause of inflation that rising interest rates can curb.

Interest rates are rising. Good news for people with old fashioned savings in the bank. Bad news for borrowers.

The Fed is trying to curb inflation. Higher interest rates tend to curb the inflated asset market, such as home values, where existing real estate inflates so high, in value, that it becomes less affordable, thus one big factor increasing the cost of living.

Other drivers of inflation may be less related to interest rates alone.

Supply chain, such as gas prices, has to do with demand outstripping supply and in some cases, business take advantage of tight supply markets to increase profits.

Then there is the problem of income inequality. There tends to be a bidding war, among businesses and institutions, for retaining their top talent. For instance colleges raising the football coach's salary to keep up with competing institutions. Most workers fall behind top stars so, eventually, there is pressure to raise all wages just to keep up with inflation. A reasonable amount of inflation, maybe even more than the Fed's target of 2%, seems acceptable to me. The problem is that everything doesn't go up evenly.

If everything were to go up evenly, we could just move the decimal point over as time goes by.

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