Theory teaches us that if inflation rises due to excessive demand, the instrument to combat it is to raise interest rates. And those increases reduce credit, demand and investment, increasing unemployment and lowering prices.
However, not everything is happening like this and this is due to the fact that inflation is not a problem of demand but of supply. The shortage of food and hydrocarbons due to the Russia-Ukraine war, which supplies 40% of the grains and 35% of the gas and oil, have had a brutal effect on prices, where the sanctions imposed on Russia play an important role. .
In the United States, inflation closed 2022 at 6.5%, although the FED increased the reference rate from a range of 0-0.25% to 4.50%-4.75%. But it turns out that, with lower growth, employment fell to a record low of 3.4%. The same is happening in Europe. How is this possible when wage increases and the financial cost have squeezed the profit margins of companies whose shares move like ping pong balls?
In the Dominican Republic, inflation closed at 7.85% and the BCRD increased the rate from 3% at the end of 2021 to 8.5% at the end of 2022, but employment has remained stable and exceeded that registered before the pandemic, with growth lower than what expected (4.9%). This rate increase did not affect credit growth in 2022 either. On the other side of the coin, inflation, although it is a scourge for economies, generates higher tax revenue.
For example, Spain received in 2022 some 36 billion euros in additional income due to inflation. The same thing happened in many economies.
In the Dominican Republic, the income received exceeded the programmed by more than RD$70 billion, largely due to inflation.
Another contradiction of neoliberal theory is that, to recover from the growth slump, expanding world trade is the perfect weapon. But it turns out that the United States, with its anti-inflation law, is returning to the era of protectionism, under the guise of “fighting the climate crisis” with large tax breaks and other benefits to promote “clean energy” while its oil exports and derivatives, thanks to the war, break records in 2022.
The displeasure of Europe did not wait, opening another front of conflict.
