Raising interest rates is not necessarily bad for the economy. It can make zombie companies go bankrupt and incentivize firms and economies to be more productive and grow.

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Very good points, Richard, also in the commentary below

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Do you go food shopping in Japan? This statistical nuance has little to do with not just the perceptions of ordinary people, but with the ability of many people in all but the wealthiest classes to feed themselves — particularly the elderly and the working poor.

And coming on top of the (ongoing) ravages of COVID on small businesses, rising food prices are putting restaurants and other food service establishments in a terrible squeeze. In my town, even businesses that were able to survive through 2020 and 2021 have been closing for good since summer 2022.

This sort of argument is rather detached from real life.

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Nov 22, 2022·edited Nov 22, 2022Author

A.J. I take your point and agree with you. The measure of inflation that you use depends on what you are trying to measure. If you are trying to measure the pain to the population, including real, i.e. price-adjusted income, then you measure total inflation.

If, however, you are trying to measure underlying trends to see how long inflation is going to stay high, then you need to eliminate highly volatile items. Otherwise, you might think inflation is too high and slow the economy unnecessarily, or you might think it's too low and add stimulus which could worsen inflation down the road.

You also want to know the cause of inflation. If inflation is caused by excess domestic demand, then raising interest rates could help by slowing the economy and reducing the excess demand. If your inflation is mostly imported, raising interest rates will further slow down an already weakened economy.

Finally, while inflation causes pain, so does the cure for inflation: higher interest rates that raise unemployment. Judging what's the best trade-off at any given level of inflation in a world of uncertainty is not easy.

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