Inflation rates are tumbling in Europe, the UK, and the USA.
Despite what mainstream economists in all these places suggested, which was that this would not happen until significant unemployment was created, which desired increase in unemployment required an increase in interest rates to precipitate an economic crisis requiring that redundancies happen, the reality is that the impact on unemployment of those rate increases has, so far and thankfully, been limited and inflation has fallen anyway.
Those who, like me, argued that inflation of the sort that we suffered was always going to be transitory would appear to have been proven right; that is exactly what it was.
Unemployment is necessary for higher interest rates to curb inflation. OK, that’s the Spudclaration there.
As a result, economies that have survived for over a decade on negative real interest rates are now having to endure positive real interest rates, i.e. base rates of interest that are in excess of the rate of inflation. What we can be sure of is that these positive real interest rates will do three things.
Firstly, they will redistribute income and wealth upward in society.
Second, they will penalise those who borrow, significantly reducing their capacity to spend.
And there we have the second Spudclaration in the same piece. Higher interest rates reduce spending and thus inflationary pressures – without there needing to be unemployment.