“Businesses will retreat from investing in new plants and equipment, merger and acquisition activity will slow and stock market values will fall. These are the natural and necessary conditions of a slowing economy.”

—John Risley

 

My May column was supposed to have been a follow-up on the causes, consequences and suggested reactions to inflation. Then the war in Ukraine intervened and I felt it deserved immediate comment. Unfortunately, both the war and inflation have only worsened. And while the war is a very material contributor to inflation, it is not the only cause.

To put it very simply, when demand exceeds supply, it is the responsibility of the world’s Central Banks to increase interest rates until demand moderates, price pressures ease and inflation comes back down. The trick is to do this without causing a recession. In practice that is enormously difficult and very seldom accomplished. What makes it doubly difficult this time around is that many of the world’s inflationary pressures are not really under the control of either the Federal Reserve Bank of the U.S. nor indeed any of the world’s Central Banks.

 

 

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