Lecture Notes on Inflation and Economic Measures

Introduction

• Inflation Concerns: Record inflation in the U.S., public looking towards the Federal Reserve (Fed) as a solution.
• Fed's Tools: Primarily raising interest rates and shrinking the balance sheet.
• Collaborative Efforts Needed: Other entities like Congress and big businesses must also engage to fight inflation.

Federal Reserve Actions

• Interest Rate Hikes: Fed raised rates five times in 2022 to combat inflation with more hikes expected.
• Effects of Raising Rates:
  • Slows inflation but increases borrowing costs for Americans.
  • Could lead to financial instability if rates are too high.

Corporate Influence

• Role of Big Businesses:
  • Companies could absorb costs instead of passing them onto consumers.
  • Some accused of "corporate greed," increasing prices more than necessary.
  • Shrinkflation observed: smaller product sizes with same prices.
• Market Power Concentration:
  • Increased consolidation since 1990.
  • Calls for addressing corporate greed as part of inflation response.

Congressional Measures

• Inflation Reduction Act:
  • $739 billion bill targeting taxes, health, and climate.
  • Aims to reform drug pricing and promote energy-efficient choices.
  • Extended health care subsidies.
  • Relief from drug price reductions expected in 2026.

Fiscal Policy Tools

• Potential Actions:
  • Lowering healthcare costs, raising tax revenue, and limiting unnecessary spending.
  • Policies could ease immediate financial pressures without worsening deficit.
  • Using targeted relief rather than broad spending.
• Deficit Concerns:
  • Reducing the deficit is key in the inflation battle.
  • Potential to end unspent COVID relief funds.

Economic Dynamics

• Wage-Price Spiral:
  • Rising wages due to inflation expectations perpetuate price increases.
• Consumer Behavior Impact:
  • Reducing consumption could alleviate inflation pressures.
• Outlook:
  • A recession is not inevitable, a coordinated effort required.
• Awaiting Outcomes:
  • Full effects of current policies, including Fed's interest rate changes, are yet to be seen.

Conclusion

• The fight against inflation involves multiple players: Fed, Congress, businesses, and consumers.
• Need for balance to prevent recession and stabilize economy without undue hardship on less wealthy individuals.