Vickrey: Cost-Push Inflation

Looking at Fifteen Fatal Fallacies of Financial Fundamentalism

Oh wow, I just got that: It's Five Fs

by William Vickrey (1996). Recommended by nanute.

...to keep wages from initiating a "wage-price spiral." One never hears of a "rent-price spiral", or an "interest-price spiral," though these costs are also to be considered in the setting of prices. Indeed when the FRB raises interest rates in an attempt to ward off inflation, the increase in interest costs to merchants may well trigger a small price increase.

When the Fed raises interest rates to ward off inflation, the increase in interest costs may well trigger a price increase.

Yes.

If only a small part of the spending we do makes use of credit, then there are only sporadic inflationary pressures resulting from the anti-inflation effort. But if a large part of the spending we do makes use of credit, then widespread and strong inflationary pressures result.

If we use credit only for growth, then the consequences of Fed actions affect only growth. But if we use credit for everything, then Fed decisions affect everything.

Robert V. Roosa, former vice president of the Federal Reserve Bank of New York and Under Secretary for Monetary Affairs at the U.S. Treasury, wrote in Fortune magazine (September 1971):

And yet another factor has been the undue reliance on restrictive monetary policy to limit demand, with the perverse result of making interest rates themselves a major cost-push force.

I'd say Vickrey understated the case.