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On Wednesday, policymakers at the Federal Reserve – America’s central bank – continued their battle against inflation with a third straight supersize interest-rate increase. And they warned that they’re not done. They’ll continue to raise borrowing costs until inflation is tamed.
They assume that the underlying economic problem is a tight labor market, causing wages to rise – and prices to rise in response. And they believe interest rate increases are necessary to slow this wage-price inflation.
This is dead wrong.
Wage increases have not even kept up with inflation. Most workers’ paychecks are shrinking in terms of real purchasing power. Rather than causing inflation, wages are actually reducing inflationary pressures.
The underlying economic problem is profit-price inflation. It’s caused by corporations raising their prices above their increasing costs.
Corporations are using those increasing costs – of materials, components, and labor – as excuses to increase their prices even higher, resulting in bigger profits. This is why corporate profits are close to levels not seen in over half a century.
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‘Most workers’ paychecks are shrinking in terms of real purchasing power. Rather than causing inflation, wages are actually reducing inflationary pressures.’ Photograph: Frank Augstein/AP
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