This would make it less financially attractive to build more housing, drawing out the problem for longer than if we just muddled through until the market corrected itself. Here, too, with housing we could even see that higher interest rates could backfire in that the cost to finance new home building will go up as interest rates soar. Those who can’t buy must rent, and rental inflation is at all-time highs. Driving demand down might help at the margins, but unless a lot more housing is built, the upward price pressures will remain.įurther, the above demand destruction path to lower housing inflation ignores the fact that demand can only go so low, as housing is a basic need. It’s a result of a massive supply shortage. After all, if fewer people can afford a home, then fewer people will buy homes, which ought to mean prices go down until they can once again become affordable.īut we must keep in mind that the current price spike in housing isn’t demand driven. In other words, in its quest to fight inflation, the Federal Reserve may make it much worse.įor housing, the argument in favor of increasing interest rates is that they make it more expensive to finance a home purchase, thereby lowering demand, which can theoretically cause prices in the aggregate to come down. If anything, the Federal Reserve bringing about higher interest rates will make it more more expensive for American farmers to take out new loans and harder for them to increase supply relative to demand. Climate change, international warfare and global trade agreements are all well beyond the scope of the Federal Reserve, so the notion that they can bring down food prices given its causes is unconvincing to say the least. India’s recently enacted restrictions on rice exports will only make things worse in the near term, and Russia could at any moment cause another spike in grain and wheat prices should it tear up its Ukraine grain deal, as Russian President Vladimir Putin is now threatening. For food, global conflict and drought are pushing up prices.

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