I am wondering what others think of a theory that raising interest rates in a tight labor environment may actually cause rather than abate inflation.
Generally, and I know I am oversimplifying this, it is thought that an increase in interest rates will slow things down by causing money to be diverted to interest payments than to "productive" uses. As a result, spending (borrowing) will slow and thus have a slowing effect on the economy.
What happens though when companies say "we are not slowing anything down, we will just raise prices to offset the higher interest costs" and in a tight labor market consumers say "if our interest expense is going up, we NEED to demand more money from our employers, which we can do given the tight labor market. If our present employer will not pay it, we will just shop around. Since the labor market is tight, we will find someone else who will pay us more since we are in demand." Of course, when the consumer gets more money, it will affect the costs of the employer and will cause them to HAVE to raise prices, i.e., inflation.
Thoughts?
Troy |
