The Inflation and Interest Rate Cycle: Rewriting the Script

It is clear that economic observers have been trained to expect an increase in inflation and interest rates as the economy begins to grow due to a recession. In this way, it could be said that the typical sequence would develop like this: employment growth (measurable at a reduced unemployment rate) would be followed by a relative labor shortage, which would result in wage growth. From there, the script calls for widespread inflation as producers try to maintain their profit margins by raising the prices of their production.

In this way, it is understood that the increase in demand results in a rising inflation rate, which in turn causes other reactions that lead to higher interest rates.

Thus, it has been said that while this traditional recovery is taking place, companies seek to expand production in a more receptive environment. Likewise, it could be said that it would take root in an increase in the demand for loans to finance this expansion and producers are more willing to pay higher interest rates to obtain credit in an optimistic environment.

A different address

One could say that an increase in the demand for loans to finance expansions would take root while producers are more willing to pay higher interest rates to obtain credit in an optimistic environment. In this way, it is understood that lenders, in turn, take advantage of this opportunity to demand higher interest rates to compensate for the decrease in real returns when holding fixed-rate securities when inflation occurs.

Now, the usual inflation and interest rate increases of past recoveries have not been totally absent in the present, but their occurrence has been very moderate, and now these trends seem to be going in the other direction.

And it is that the inflation rate of the USA during this recovery it has had problems in the decade since the recession and has not reached the 2% threshold that the Fed has declared would be its upward tolerance to inflation. Even so, it has been said that given the extreme monetary adaptation during the Great Recession, it seemed sensible to the Federal Reserve to obtain an initial advantage to reign in the economy.

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Source: The Spellman Report