If inflation lowers demand, would that not eventually offset inflation naturally without government intervention?

Question

If inflation lowers demand, would that not eventually offset inflation naturally without government intervention?

In: 42

Answer 1

It very much depends on what is driving price rises. If it’s monetary supply, then that’s a result of government intervention, and so a corresponding government intervention (raising rates) is the main lever to address it.

But if it’s not monetary supply – if instead it’s due to short-term geopolitical events and/or shocks exposing structural failures in the economy itself, then what raising rates accomplishes is it lowers the ability of those most impacted by higher prices to seek credit to support their higher expenditures.

One of these scenarios hits primarily at the top of the income distribution, while the other hits primarily at the bottom. When you hit the bottom too hard, you get recessions.