Runaway inflation? Over to you, J-Pow.

The main message from yesterday's Federal Reserve meeting and rate decision was their determination to do whatever it takes to halt inflation in its tracks.  

They’re worried about it, that’s for sure. So it’s worth reminding ourselves what the panic is all about.

The main problem with inflation is it gets into our psyches and we expect it to continue. It becomes a self-fulfilling feedback loop where we think prices are rising, so we go out early and buy. At the same time, sellers think their costs will go up, so they keep jacking up prices, and so on.

This is why economists say it isn’t inflation itself that’s the problem, it’s our expectations about it that matter.

It’s also why central bankers like Fed chair Jerome Powell are so stern in their messaging. They are trying to calm us down, and reassure us they’re in control.  

It’s the same playbook former chancellor George Osborne used just after the global financial crisis. Then it was about reassuring the market that the Treasury was serious about bringing down borrowing, to keep rates lower and not risk more economic damage. 

It didn’t matter that the actual deficit was still rising, it was the promise that they were in control. And it worked. 

So if the rhetoric, alongside slower growth and an improvement in supply constraints keeps a lid on inflation, this might all turn out well in the end.

Keep in mind it’s not too long ago that the Fed would have bitten your hand off for a bit of inflation. 

This is because of debt. If you’re indebted, like all governments are, there are only three ways to pay off your loans.  

One is to grow your way out of trouble. Debt is measured relative to GDP so if you grow GDP, your debt levels look better. 

Another is good old fashioned repayment. Option one helps with that as it gives you more money to play with. Otherwise, it’s about belt-tightening and austerity.

The last option is to inflate your way out of debt. If you owe a fixed amount and prices keep rising, the real debt you owe magically starts to shrink.

Just like a mortgage. A controlled amount of inflation, increasing house prices and wages, makes the amount owed to the bank (which stays the same) look a lot better. 

Stock markets can have short memories but we doubt central bankers do. If they can control inflation and economies continue to grow, we might all be looking back and wondering what all the fuss was about. 

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