> And judging how many people I know around town who have been treating their houses like ATMs, it's not a small effect.
This is true, this is at least appealing to common sense. But I don't see how that excess cash was going into spending more on food and gas.
If I run a supermarket and raise prices, and people like lettuce, if they keep buying the lettuce, because $3.75 lettuce is still worth it compared to $2.00 lettuce, well, CPI can increase a lot, and demand appears to be inelastic, and interest rate increases did nothing to reverse CPI.
> No it doesn't suck money out, but it reduces the rate at which new money is created through borrowing.
This is true. It does not tell me how the money created through borrowing between 0.75% rates and 4.00% rates was used to buy food and gas though.
That borrowed money was overwhelming actually used to buy equities, which the fed is obviously impacting very effectively, and not food and gas, even indirectly.
> The reduced demands for goods then filters through the system producing more layoffs and more reduced demands for goods across every sector and the economy contracts into a recession.
Yes, but prices are not demand, they are supply and demand. What if you shut down the parts of the economy that make food and gas?
For example, how do fed interest rates shut down the parts of Saudi's economy that makes oil?
Anyway, in your explanation, you do not use the words "food" or "gas" which is how the "CPI" is calculated.
> Honestly don't know why this is such a mystery to everyone or why the question needs to be a "meme", it is pretty straightforwards.
Using the words in the question to answer the question is "straightforwards."
> Without enough money, some people will cancel their planned trip to Hawaii.
By this logic, why doesn't Congress illegalize travel? Is that going to reduce the cost of travel? Will that reduce CPI, which measures prices, not demand?
> Or they won't buy another TV,
What if we illegalized buying TVs? Would that make TV prices fall? You think that is going to reduce CPI?
I'm not saying your explanation here is stupid. It is the first one in a while that seems to at least appeal to common sense. I am just trying to show that CPI measures prices, it does not measure demand or supply alone for goods.
> With less people competing for precious gas, its prices drop.
Gas prices rise and fall all the time. Lots of factors go into its price. You could illegalize gas, would this cause the price of gas to rise or fall?
> but does not necessarily reduce the supply of goods
Every mainstream economist agrees that rising interest rates increases unemployment.
Well you need human beings to go and make stuff like food and gas. That stuff is also already made as efficiently as possible. So supply is definitely, also, going to be reduced.
> The only way to reduce prices of oil/gas and fertilizers (for food) is to bring back the amount of oil/gas and ammonia that went offline due to Russia. There is no amount of digging anywhere in the world that will quickly replace this much lost natural resource.
At least this has a modicum of common sense to it.
As others have pointed out, oil prices fluctuate all the time though. So do food prices.
Gas can affect retail prices, because to me, common sense says, you use gas, not oil, to move food from wherever it is to the supermarket and into people's carts, back to their homes. And gas prices are not oil prices. And a lot of the price of many goods is, secretly, gas, because that is how the people get to where they work, how the goods that are otherwise useless without transportation get to where they're sold, etc.
> What raising interest rates will do is cause less spending in all non-oil/gas goods and services.
So what? The CPI, even the "core" CPI, is food and gas, or food and gas in disguise.
Even if you buy less clothing, a lot of the price of the clothes doesn't come from demand. It comes from the price of the gas used to move it from A to B and all the people involved moving it, and the price of the food to feed all the people who made it and sell it. Gas and food are hiding in all the inputs of clothes. There is a floor on the cost of clothes, it keeps rising, what exactly will increasing interest rates do to the rising (producer's) cost of clothes?
Does it suck money out of the system? Here's a common sense example: Raising interest rates caused assets like stocks and bonds to decline in price. People sell these equities and now have cash they are willing to spend on more shit, specifically what is in the CPI. So the opposite can also happen.
> Interest rates make things requiring financing (cars, homes, stuff bought on credit) more expensive and out of reach.
This is complex.
Lower interest rates overall increase home prices, because people buy the biggest home they can afford on a monthly payment.
There are many kinds of cars. Some are cheap and some are expensive.
Anyway, how do interest rates make things like food and gas more expensive and out of reach? Those don't require financing. They're hugely impactful on inflation. You can be the Fed, and pretend there's a "core" CPI, but the people who make your clothes and cars need food and gas, your clothes are made with a lot of gasoline directly, via shipping and manufacturing, etc., so it is sort of a fiction that there is this non-food-and-gas CPI.
> The Fed's tools are very blunt, and the only way it can reduce at-the-register prices for things like food and gas are indeed by hammering down aggregate demand, i.e. inducing a recession.
By some measures, it's not even succeeding in inducing a recession. Demand isn't even necessarily declining - you would need a common sense explanation why the rate of increase in demand doesn't sometimes fluctuate or go down anyway, in the absence of fed action.
The Fed's tools are extremely effective at taking a huge shit on bond prices. They have huge financial impacts. But you are not giving me a common sense explanation for how raising interest rates will reduce the prices of food and gas.
> It won't, because the current inflation is supplyside-driven, not expectations-driven. But if we transition to an expectations-driven inflation regime, that's really bad, because it would require much more severe action to bring under control. The Fed is doing this as a preventive measure to keep expectations-driven inflation from taking hold. It sucks, but it's being done to prevent more pain later.
Well, I don't see a common sense explanation as to why the rate of increase should decrease either. We could also say, "Eventually, the rate of increase will go down anyway, in the absence of any action from the fed."
You can be stupid and talk about buying food and gas on credit cards. Very few people in this country will stop buying food and gas to prevent default. People need food and gas to survive. So it's not really the borrowed money that is spent on food and gas.
This is true, this is at least appealing to common sense. But I don't see how that excess cash was going into spending more on food and gas.
If I run a supermarket and raise prices, and people like lettuce, if they keep buying the lettuce, because $3.75 lettuce is still worth it compared to $2.00 lettuce, well, CPI can increase a lot, and demand appears to be inelastic, and interest rate increases did nothing to reverse CPI.