Mitigating inflation with higher interest rates causes stagflation. Why? The Fed targets unemployment as the yardstick for their intervention. The Phillips curve shows a historical correlation between inflation and low unemployment. It does not show cause and effect. It begs the question, which is worse unemployment or inflation. Truly increasing interest rates to an unsustainable level will eventually cause unemployment to rise and slow inflation. What a cruel solution.
If inflation results from simple supply and demand, one might better take action that increases supply of products to the point of reducing demand. Decreasing the money supply also reduces inflation, but an emotional loss of consumer spending also causes establishments to raise their prices to cover their fixed costs.
Decreased regulation, decreased taxes and local production incentives should do more to control inflation than increased interest rates. Produce your way out of inflation. The velocity of the economy does more than the money supply.
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