Higher Interest Rates Can Take a Long Time to Bring
Down Inflation
https://www.wsj.com/articles/higher-interest-rates-can-take-a-long-time-to-bring-down-inflation-11666517405
Tom Fairless notes:
They have raised interest rates this year at the fastest pace in decades. But those hikes work with what economists call “long and variable” lags so central banks might not know for years if they have tightened too much, or not enough.
Why the lag? Interest-rate changes filter through to inflation in a series of steps. The short-term lending rates controlled by central banks steer other borrowing costs in the economy, including deposit and lending rates for households and businesses, with a delay because loan contracts take time to change.
Higher borrowing costs and lower asset prices deter households and businesses from borrowing and investing, which weakens sales and the ability of companies to raise prices and workers to win raises. But it takes time to cancel projects or shed workers. Some consumers will follow through with long-planned purchases, such as a new car or kitchen. Businesses might not reduce their workforce until they feel sure that the outlook has changed.
https://www.wsj.com/articles/higher-interest-rates-can-take-a-long-time-to-bring-down-inflation-11666517405
Tom Fairless notes:
They have raised interest rates this year at the fastest pace in decades. But those hikes work with what economists call “long and variable” lags so central banks might not know for years if they have tightened too much, or not enough.
Why the lag? Interest-rate changes filter through to inflation in a series of steps. The short-term lending rates controlled by central banks steer other borrowing costs in the economy, including deposit and lending rates for households and businesses, with a delay because loan contracts take time to change.
Higher borrowing costs and lower asset prices deter households and businesses from borrowing and investing, which weakens sales and the ability of companies to raise prices and workers to win raises. But it takes time to cancel projects or shed workers. Some consumers will follow through with long-planned purchases, such as a new car or kitchen. Businesses might not reduce their workforce until they feel sure that the outlook has changed.