According to De Jong, there are several problems that require opposing policy measures. Politicians are faced with the challenge of keeping inflation in check without pushing the economy into recession and without creating financial strain on the system. ‘At the same time, social cohesion must be preserved. And this against the backdrop of a war and the fragmentation of the global economy.’ A many-headed monster against which politicians can only deploy a limited number of tools.
Dilemmas
Policy makers face major dilemmas: different challenges require ‘contradictory responses’ with different policy tools. Inflation is fought with higher interest rates, but this increases the possibility of a recession. However, interest rates have now risen so rapidly that financial instability threatens. According to De Jong, politicians should actually respond to this stress by lowering interest rates, but this is not possible.
Another option is to make liquidity available, but this can fuel inflation.
‘It would be naïve to think we managed to keep inflation under control’
Other causes
Incidentally, according to De Jong, it is still too early to claim victory over inflation. Inflation was initially driven by rising energy prices, disrupted supply chains and rising transportation costs, but these problems appear to be a thing of the past. De Jong therefore thinks we will see inflation fall in the next six months, but he warns that underlying inflation now has completely different causes: high wage growth and companies wanting to defend and increase profit margins.
According to him, it would therefore be naïve to think that we have succeeded in keeping inflation under control.