Comment by ElevenLathe
17 days ago
Why wouldn't a rate hike make a difference? It will lower demand and therefore prices, no? I mean, this isn't really something that we should celebrate or want, since it essentially just means discouraging people from buying shoes because they can't afford it, but it does bring the prices down (or at least slow the rate of shoe price increase).
A couple of things. In practice, most goods are actually priced as cost-plus, with very thin margins, and any response in prices is highly asymmetric.
If the purchase costs for a good suddenly increase, retailers will increase prices very quickly because they would otherwise start losing money very quickly.
If demand for goods decreases, that doesn't affect the retailer's cost of goods at all, and if they were to reduce their prices, they'd eliminate their thin margins. From their perspective, it's better to sit on inventory for a while.
So any downward pressure on prices would happen much more slowly.
BTW, this kind of asymmetry is why a bit of inflation is good, actually. Inflation acts as a universal and permanent downward pressure on (real) prices, in the sense that if retailers and others are unable to justify an increase in nominal prices to their customers, their real prices will drop.
True but that mechanism is indirect at best. Usually high interest rates discourages more borrowing and lowers spending that way.
But in this case the price increase is already due to the government putting its thumb on the scale. The best way to reduce the price is not via the Rube Goldberg interest rate mechanism to shrink spending and thus demand for the $60 shoe, but by removing the tariff and make it a $30 shoe immediately.
It is how it works in all scenarios, though. Higher rates usually cause people to spend a little less which is a reduction in demand.
Sure but it's extra stupid to do it that way. Cause inflation with a tax, then mess with the money market to fix the inflation.
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