Central Banks Raise Rates, But They Can’t Control Inflation

The timid interest rate hikes by the Federal Reserve and the European Central Bank sent global stock markets into a free fall last Friday and again this week, but they won’t stop the hyperinflationary spiral. Not because current inflation has nothing to do with the money supply, but exactly the opposite.

True, energy and energy-related prices account for 80% of consumer price inflation, but energy prices skyrocketed long before the Ukraine war, due to financial speculation. Once financial assets stopped bringing enough profits, the liquidity began to spill over into commodities. The increased demand for fossile energy sources in Germany, because of the renewables flop in spring 2021, was the occasion offered to financial vultures to shift hundreds of billion bets into energy markets. The EU’s “green transition” policy and sanctions against Russia have made sure that future prices on natural gas will stay high throughout 2023.

This being said, for central banks to curb energy-driven inflation with monetary means would require a double-digit tightening, similar to what Paul Volcker did in the United States after the breakout of the Bretton Woods agreements. You can figure out what this would mean for a financial system that threatens to collapse, like now, after a rate increase of half a point. Five megabanks that constitute the core of the US.S. financial system have lost $300 billion in market capitalization just since June 2021.

Thus, central banks are likely to return quickly to Quantitative Easing after the attempted Quantitative Tapering. As we speculated last week, this will probably occur after the Jackson Hole yearly central bankers meeting at the end of August (cf. SAS 23/22)