Raising interest rates is the wrong solution to the inflation problem, analyst says

One analyst said that raising interest rates is not the right solution as high prices have been driven mainly by supply chain shocks.

During Covid lockdowns, global manufacturers and suppliers have not been able to produce and deliver goods efficiently. Sanctions imposed on Russia have reduced supply.

"Supply is very difficult to manage, we are finding across a whole bunch of industries, a whole bunch of businesses, they're having very different challenges just turning the taps back on."

He said that on American independence day, this is sort of a co-dependence day where Europe is shooting itself in the foot because of sanctions.

The Fed is the first to say monetary policy can't do much about supply shock. They increase interest rates.

The U.S. Federal Reserve increased its benchmark interest rate by 75 basis points to a range of 1.5%-1.75% in June — the biggest increase since 1994. Fed Chair Jerome Powell (above) flagged there could be another rate hike in July.

Governments around the world focus on cooling demand as a way to rein in inflation. The lifting of interest rates is intended to make demand more consistent.

The U.S. Federal Reserve increased its benchmark interest rate by 75 basis points to a range of 1.5%-1.75% in June, the biggest increase since 1994.

The Reserve Bank of Australia is set to raise rates again on Tuesday, and other Asia-Pacific economies are following suit.

The Fed said in a statement that it decided to raise rates because the economy appeared to have picked up in the first quarter.

Gambles said demand is still below its pre-pandemic level, but wouldn't have fallen short if Covid hadn't blocked it.

We are still about 10 million jobs short of where we would be if we hadn't had Covid and the lock downs. There is a lot of potential slack in the labour market. That doesn't translate to the actual slack.

I don't believe that's a monetary policy issue. I don't think monetary policy would have much of an effect on that.

It would be difficult for central banks to maintain a sustained grip over inflation because of supply shocks.

Gambles said that the US should look at a fiscal boost to fix inflation.

The U.S. federal budget is $3 trillion lighter than it was two years ago. We have a huge shortfall going into the US economy. There is little monetary policy can do about that.

Adjusting monetary policies is not the right solution to the problem.

HSBC senior economic advisor Stephen King is one of the "unconventional economists" cited by Gambles that has put forward analyses saying that the workings of both sides of the equation are responsible for inflation.

King has said that both the Russia-Ukraine war and supply chain upheavals have contributed to rising inflation.

The COVID-19 crisis was seen as a demand challenge in the economy. King said in a note that central banks responded by offering very low interest rates and continued quantitative easing.

COVID-19 had limited demand side effects in the advanced economies.

Markets now work less well, countries are economically disconnected, and workers are less able to cross borders as a result of supply-side effects. Inflation is only likely to occur when policy conditions are loosened.

He said that since supply is unable to respond to increased money, prices have to go up.

The popular way to fix inflation is by raising interest rates.

Economists are worried that the use of interest rate hikes to solve inflation could cause a recession.

It's more expensive for firms to expand when interest rates go up. Cuts in investments could hurt employment and jobs.