Bellemare’s bill is the latest case of politicians weighing in on the institution’s interest rate and policy decisions this month.
Bellemare’s bill is the latest case of politicians weighing in on the institution’s interest rate and policy decisions this month.
While that is generally true, in this case inflation is being driven by increased spending on interest. It is specifically higher interest rates that is causing the inflation we see. We have been within the target range for quite some time when excluding interest costs from the CPI basket of goods.
As you know, debt becomes more appealing in a high inflationary environment. If $1 today is worth 50¢ tomorrow (inflation), your debt outstanding was just cut in half! That is one hell of a steal. This is why interest rates rise with inflation in order to maintain equilibrium.
With interest being the driver of inflation this time, it has created an interesting feedback loop where every time the interest rates rise, people spend more on interest payments, which sees inflation rise, which makes debt more appealing, which sees interest rates rise, which sees people spend more on interest, which sees inflation rise, so on and so on.
You can cure this with high interest rates, but they have to be really high. Bring back 1980s-style 20% interest rates and those people paying more and more interest will break before anyone realizes that inflation is still running rampant. Once they have defaulted, and thus no longer paying interest, that will bring inflation in line pretty quickly.
I don’t think we have the will to do that, though. Which means we do need some other mechanism to break the cycle.