Does raising base rates really reduce inflation?

[ursaminortaur]

So turning it around, it looks as though Mr Hunt considers a low unemployment rate to be a cause of high inflation, so measures to raise the unemployment rate are necessary. Is he right? Is it possible to have both inflation at 2% and low unemployment concurrently?

Are there ways available for a government to raise the unemployment rate, other than inducing a recession by increasing borrowing costs to businesses and consumers? Maybe controls of some sort on credit other than making it expensive? We tried that in the 60s IIRC. What happened?

Phillips curve.

https://www.investopedia.com/terms/p/phillipscurve.asp

But as it says this inverse relationship between unemployment rate and inflation was disproved by the stagflation of the 1970s where there were high levels of both unemployment and inflation

Key Takeaways

* The Phillips curve states that inflation and unemployment have an inverse relationship. Higher inflation is associated with lower unemployment and vice versa.

* The Phillips curve was a concept used to guide macroeconomic policy in the 20th century, but was called into question by the stagflation of the 1970s.

*. Understanding the Phillips curve in light of consumer and worker expectations shows that the relationship between inflation and unemployment may not hold in the long run, or even potentially in the short run.

[Nimrod103]

But as it says this inverse relationship between unemployment rate and inflation was disproved by the stagflation of the 1970s where there were high levels of both unemployment and inflation

Actually there was a very good inverse relationship between unemployment and inflation. Particularly note the relationship between 1972 and 1997, during which the period of so called stagflation occurred in the 1970's.

https://imgur.com/1VJy9gw

[Charlottesquare]

Phillips curve.

https://www.investopedia.com/terms/p/phillipscurve.asp

But as it says this inverse relationship between unemployment rate and inflation was disproved by the stagflation of the 1970s where there were high levels of both unemployment and inflation

Key Takeaways

* The Phillips curve states that inflation and unemployment have an inverse relationship. Higher inflation is associated with lower unemployment and vice versa.

* The Phillips curve was a concept used to guide macroeconomic policy in the 20th century, but was called into question by the stagflation of the 1970s.

*. Understanding the Phillips curve in light of consumer and worker expectations shows that the relationship between inflation and unemployment may not hold in the long run, or even potentially in the short run.

I was not positing my belief in the Philips curve, more that the relationship has been proposed over many years, certainly when I did study some economics at uni in the early 80s it raised its head and no doubt still features in undergraduate lectures.

Personally I believe all firm views on economic relationships, if A then B, are mainly flawed, all seem to have an existence but all have exceptions; frankly imho there are always too many moving parts to isolate just two and say if A then B.

This is likely my cynicism of economics and politics arising as I get older and I now scream at the TV when politicians mouth their stock learned economic certainties. Obviously they have taken "Their Party's Economics Course 101" and fully digested same (without a thought of their own) and rather than caveat what they say to deal with reality just mouth out their party platitudes.

[AsleepInYorkshire]

The Guardian view on inflation: stop hitting homebuyers and squeeze the super-rich

“The plan is working,” is how Rishi Sunak greeted Wednesday’s news of a fall in the rate of inflation. “If we stick to the plan I’ve set out, we’ll get it done.”

Up to a point, prime minister. Mr Sunak’s “plan” is really nothing of the sort. It is an aspiration to halve the rate by which prices are rising rather than, as is commonly assumed, for prices to fall.
...
With only four months before his self-imposed deadline, this looks like one life goal the man in No 10 will miss.
...
Last month, the Institute for Fiscal Studies revealed that it was City workers and those in the energy sector who were taking the outsize pay rises, while those outside London in manufacturing, hospitality and education are seeing their incomes shrink.
...
The obvious solution to this would be for the Bank to ease off on interest rate rises and for the government to tax high earners.
...
If Mr Sunak is appalled by the idea of taxing his former workmates in the City, perhaps one of his opponents might take it up. Did someone mention the shadow chancellor, Rachel Reeves?

AiY(D)