Interest Rate Hikes Are Ineffective Against Supply-Side Inflation Shocks
Source: https://www.theguardian.com/profile/josh-ryan-collins. "Interest rates are not the tool to solve the inflation caused by the US’s war with Iran | Josh Ryan-Collins | The Guardian." March 18, 2026. www.theguardian.com
The Gist
The author argues that raising interest rates won't fix inflation caused by war disrupting oil and gas supplies. Instead of making borrowing more expensive (which hurts the economy), the government should use price controls and public ownership to stop companies from passing high costs to consumers.
Conclusion
The Bank of England should continue lowering interest rates rather than raising them in response to the current inflation caused by the US-Iran war, and instead support alternative measures like price controls and public ownership
Premises
- The current inflation is caused by a supply-side shock (closure of Strait of Hormuz affecting oil, gas, and fertilizer supplies) rather than demand-side pressures
- There is little evidence that the rapid interest rate hikes of 2022 made a significant difference to inflation - price declines came from falling energy and food prices, not monetary policy
- An IMF study found that inflation-targeting central banks that rapidly raised rates in 2022 performed no better than non-inflation targeting banks
- The current economic context differs from the 1970s: labor is much weaker due to declining unions, while firms in energy and food sectors have significant market power
- Recent inflation was driven by 'profit-price' spirals rather than 'wage-price' spirals, with firms maintaining profits by raising prices
- Household inflation expectations are driven by actual prices of frequently purchased goods rather than beliefs about central bank credibility
- Alternative measures like price controls and public ownership (as used in Spain) were more effective at controlling inflation than interest rate hikes
Assumptions
- Supply-side shocks require different policy responses than demand-side inflation
- Central banks' current framework is outdated and based on 1970s conditions that no longer apply
- Government intervention in markets through price controls or public ownership is economically viable and effective
- Investment in clean energy sectors is crucial for long-term economic resilience
- The primary goal should be protecting households from price shocks rather than maintaining central bank credibility