Inflation VS Interest Rate
With Interest rates and inflation having significant increases recently, they became the topic of the year within the financial industry, as they should. With these topics being the main economic and monetary policy drivers, it is important for us to understand them.
We can look at both as forms of taxation. Inflation is more of a "discretionary tax", Interest rate is more of a "systematic tax".
Inflation is fueled by higher demands and/or lower supply. Consumers that choose to accept the higher prices and continue to purchase cause inflation to behave as a "discretionary tax". Meaning as consumers buy a new car, house or a boat, inflation becomes a “tax” on those consumers who choose to increase demand by purchasing.
Keep in mind, the billions of "new money" which the government injected into the economy didn't help the inflation issue either.
To fix inflation, the government decided to discourage demand by increasing interest rates, since they have less influence on supply.
Interest rate is more of a leader than a follower as a monetary tool. As interest rates start to go up, it adds cost of living "systematically" by adding cost of borrowing in a mortgage, car loan, business loan, and any consumer debt such as credit cards and lines of credit. Unfortunately, most households do carry debts, hence interest payments. Therefore, interest rate hikes are like a "systematic tax" which discourages overall cost of living.
The ultimate goal is to slow down spending. However, what happens when/if we start to spend less? The economy depends on us to spend, yet we are not. Then the economy will have to slow down, in forms of less production and services, such as travel and renovations.
If the inflation issue is resolved, what would have happened to the stock market, housing and leading market. What are the by-products of fixing inflation?