Chasing inflation backwards

So the latest CPI numbers came out today, followed closely by chicken little and all her friends running around screaming “inflation!!” Looks like energy costs may be, in fact, starting to creep into our price experience.

What doesn’t make sense to me, a degreed armchair economist, is just why exactly a federal reserve would chase energy-derived inflation with higher interest rates. I am reminded of my youth, where high gas prices conspired with rising interest rates to create one of the most ridiculous times in US economic history.

If inflation is being born from a high flying economy, sure, bring this economy back down with a little borrowing pressure. When the economy is not high flying however, and instead prices are rising due to raw, resource-relalated input prices (aka. OIL), let’s keep our finger off the “raise rates” button for awhile.

Not to mention, there would appear to be gazillions of dollars worth of capital sitting around. Do you want to direct that capital towards the government’s willingness to borrow more than ever? Or direct it towards investment in production and new combinations? Particularly at a time when local investment in new energy technologies and global competition for labor is prime.

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