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Inflation Dos and Don’ts
Today’s inflation is driven largely by supply-side constraints, which call for supply-side solutions. Such measures would do as much to tame higher prices as limited increases in interest rates would, and they would not come at the expense of American workers and the broader economy.
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NEW YORK – In the decades since the 1970s oil-price shocks sent inflation soaring and shackled economic growth, price stability was maintained even when growth was robust. Many policymakers and economists took a bow, proudly claiming that they had found the magic formula. Underpinning the so-called Great Moderation were independent central banks that could anchor inflationary expectations by credibly committing to raise interest rates whenever inflation reared its ugly head – or even act preemptively when necessary. Independence meant that central banks need not – and typically did not – worry about balancing the costs (generally lost output and jobs) against any putative benefits.