Mazene SERGHINE MBFA

Even super-tight policy is not bringing down inflation

1) Summary:

This article was published in the October 23rd, 2022 issue of the Economist. It was written by
journalist Jack Richardson. In this article, the journalist broaches the topic of inflation and how
governmental policies are not working against it.

In the introduction, the journalist said that, in July 2021, unlike Europe and the US, the Central
Bank of Chile has increased and continues to increase the interest rate in order to prevent the
country from inflation. Thus, despite the speed of his act, prices continue to rise and inflation
devours the country. the Central Bank has leaned towards measures of core inflation. However,
Chile is only an example proving that even a quick intervention to stop the worldwide inflation
is not enough. it silences those who say that today's inflation problem could have been avoided
if the authorities had intervened sooner. Next, we are told about HIKELANDIA which is a
group of seven countries (Brazil, Hungary, New Zealand, Norway, South Korea, Peru and
Poland) the central bank started a tightening cycle at least a year ago, and did so after having
slashed interest rates to an all-time low early in 20 the covid-19 pandemic. In this group of
countries, the economy is weaking compared to the world average specially in the property
market. Even worse, the inflation rate continues to rise by several points widening the gap with
the global inflation rate in those countries. Moreover, inflation continues to wreak havoc in
HIKELANDIA.
In the end the author informed us that Hikelandia’s struggles raise three possibilities. The first
one is that the idea of the fall of inflation is unrealistic due to the lag between tighter monetary
policies and lower inflation. The second one is that the Central Banks of HIKELANDIA should
have raised more aggressively the interest rates. The last one is that it is hard to stop inflation
by those policies and governments should think of new norms like behavior changing to stop
the worldwide inflation. Here the author states that if the norms have shifted, new tools and
policies are needed to beat inflation.

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 2) Problematics and author’s thesis:

A/- In his article the author addresses the global problem of the continuous increase in the
inflation rates, especially countries of HIKELANDIA which are the most affected despite their
early initiatives after the COVID 19 crisis.

Three theses have been raised by the author:

Ø The first is the unrealism of the idea of lowering inflation today because of the lags
between tighter monetary policy and lower inflation;

Ø The second is that the central banks of HIKELANDIA will have to increase even more
the key interest rates;

Ø The last and most appropriate is that the standards have changed and we must proceed
differently.

B/- Clarification of key concepts:

Central Bank: “A central bank is a public institution that manages the currency of a country or
group of countries and controls the money supply – literally, the amount of money in
circulation. The main objective of many central banks is price stability. In some countries,
central banks are also required by law to act in support of full employment” 1

Inflation: “Inflation measures how much more expensive a set of goods and services has
become over a certain period, usually a year” 2

Core inflation: “Core inflation is the change in the costs of goods and services, but it does not
include those from the food and energy sectors. This measure of inflation excludes these items
because their prices are much more volatile. It is most often calculated using the consumer price
index (CPI), which is a measure of prices for goods and services” 3

Interest rate: “An interest rate tells you how high the cost of borrowing is, or high the rewards
are for saving” 4

1
www.ecb.europa.eu
2
www.imf.org
3
www.investopedia.com
4
www.bankofengland.co.uk

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Gross Domestic Product (GDP): “Gross domestic product (GDP) is the total monetary or
market value of all the finished goods and services produced within a country’s borders in a
specific time period. As a broad measure of overall domestic production, it functions as a
comprehensive scorecard of a given country’s economic health” 1

Monetary policy: “Monetary policy concerns the decisions taken by central banks to influence
the cost and availability of money in an economy” 2

C/- Links with finance:

The article speaks precisely of monetary policy, and when we speak of the latter, we must
mention the two terms "Hawkish" and "Dovish". these two words refer to the political
orientation of a central bank. what interests us in this case is the "Hawkish" policy because it is
generally applied in order to fight against inflation and among the measures available, the
increase in interest rates.

3) Critical analysis:

In this article the author refers to the fact that countries that have anticipated inflation by raising
the interest rate are still suffering from it. The author raised three possibilities that were already
mentioned above.
From an economic and personal point of view, this is incorrect. On the one hand, the author
talks about the behavioral changes of households and employees as if it makes no sense for
them to demand higher wages in order to live. However, inflation is not their fault and it did
not emerge because of them. On the other hand, inflation is an embodiment of embedded
energy, so fighting it through monetary policy is ineffective because crushing the energy
demand of poor countries will have almost no effect on the global economy. Furthermore, and
according to the author's logic, if countries like the UK did not have low interest rates in
previous years, there would be no inflation today, whereas no, the cause of inflation is the global
energy and resource supply shock. Finally, it is necessary to focus on the most appropriate and
effective way to fight energy inflation. Either by destroying the global demand (= having a
poorer world), or by focusing on the global supply which is not and will not be appreciated by
many. For me the way out lies in investing in renewable resources and nuclear power.

1
www.investopedia.com
2
www.ecb.europa.eu

3
Bibliography
- www.ecb.europa.eu

- www.imf.org

- www.investopedia.com

- www.bankofengland.co.uk