Most importantly, the US Federal Reserve may raise interest rates too far and too fast. Today’s inflation is largely driven by supply shortages, some of which are already in the process of being resolved. Raising interest rates therefore might be counter-productive. It will not produce more food, oil or gas, but it will make it more difficult to mobilise investments that would help alleviate the supply shortages.
Economics has been called the dismal science, and 2023 will vindicate that moniker. We are at the mercy of two cataclysms that are simply beyond our control. The first is the Covid-19 pandemic, which continues to threaten us with new, more deadly, contagious, or vaccine-resistant, variants. The pandemic has been managed especially poorly by China, owing mainly to its failure to inoculate its citizens with more effective (Westernmade) mRNA vaccines.
The second cataclysm is Russia’s war of aggression in Ukraine. The conflict shows no end in sight, and could escalate or produce even greater spillover effects. Either way, more disturbances to energy and food prices are all but assured. And, as if these problems weren’t vexing enough, there is ample reason to worry that the response from policymakers will make a bad situation worse.
