Inflation in the US is increasing month by month, and the central bank has started to introduce strong measures to try to get control. In June, inflation rose to 9.1 per cent compared to the previous year. The last time the US central bank increased the key interest rate was in June, when they raised it by 0.75 percentage points. Inflation has made food more expensive for households. Photo: FREDERIC J. BROWN / AFP – If you lose control of prices, there will be more uncertainty. It becomes difficult for people to invest and plan consumption. We have seen historical examples that things can go wrong if you lose control of it, says Katrine Vellesen Løken, professor of economics at the Norwegian School of Economics, to news. – There is a lot that affects both prices and unemployment, crisis and supply chains, for example. Thus, it is not completely certain, but it is one of the few instruments we have to try. Raising interest rates is a means a country’s authorities or central bank can use to curb inflation. Interest rate hikes make it more expensive to borrow money from the bank. A rise in interest rates will thus dampen demand in the market, which several economists warn will create an economic crisis. According to economists at Goldman Sachs, the probability of an economic crisis in the US is 50 percent in the next two years. Disagreement about the medicine The interest rate hikes have also led to political disagreement in the US about how to deal with the high inflation. The Democratic senator from the state of Massachusetts, Elizabeth Warren, has warned in an article in the Wall Street Journal that the interest rate hikes will hurt the working class. The former finance minister of the United States, Lawrence Summers, said in an interview to CNN that the central bank must adopt stronger instruments, and that not getting inflation under control would be a bigger mistake than allowing an economic crisis. The US is experiencing the highest inflation in 40 years, and the country’s president, Joe Biden, has expressed that getting the increased prices under control is his top priority. Petrol has had one of the highest price increases. Photo: JOSEPH PREZIOSO / AFP – Inflation is the most pressing economic challenge. It affects almost every single country in the world, says Joe Biden in a press release. – We must manage to get price inflation under control faster, says the president. Almost all sectors in the United States are affected by inflation. Food prices have increased by over 10 per cent and petrol prices have increased by almost 60 per cent compared to the previous year. Must avoid an economic crisis The challenge for the Central Bank is to raise interest rates enough to curb inflation, and at the same time avoid an economic crisis. – Inflation is not necessarily a bad thing. We will have an economic crisis now if central banks adopt aggressive strategies to stop inflation, says Adam Tooze, professor of economic history at Columbia University to news. – In this case, it may be central bank policy that triggers it. The global growth forecast of the International Monetary Fund is 3.2 per cent for 2022. In 2021, global growth was 6.1 per cent. The US has seen historically low unemployment. A fear many have is that interest rate increases will lead to increased unemployment. The US has had low and stable unemployment in recent months. That can change with interest rate hikes. Photo: ROBYN BECK / AFP – There is a risk that unemployment will increase from what is a historic low, said central bank governor Jerome H. Powell in a hearing before the finance committee in the House of Representatives in June. – Part of the cost of raising interest rates is that unemployment increases a little, says Katrine Vellesen Løken. Gross domestic product in the US for the second quarter will be published tomorrow. In the first quarter, the American economy shrank by 1.6 percent. A decline in two quarters is a typical sign of recession.
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