(March 11) Inflation has reached ghastly proportions, as a new report shows. Its oxygen supply must be cut.

The official Consumer Price Index numbers released Thursday were like a nightmare from the 1970s. Prices rose 7.9% in the last 12 months, and they rose at an annualized 9.6% rate in February. And as my colleague Tiana Lowe noted, the particular nature of this inflationary spiral makes the price hikes an even heavier burden than usual for people with lower incomes.

Half-measures won’t work to fix this problem. Bold action is needed in three areas.

The first is monetary policy. The great economist Milton Friedman once noted that, even if other causes contribute to price hikes, in the final analysis, “inflation is always and everywhere a monetary phenomenon.” If the quantity of money increases faster than the production of goods and services, then price inflation is inevitable. To slow that increase, the first arrow in the Federal Reserve Board’s quiver is its control over the “federal funds” interest rate. It must be raised.

Earlier this month, Federal Reserve Chairman Jerome Powell predicted the Fed soon would raise the funds rate, which has stood at essentially zero for several years, by a quarter of 1% (25 basis points). That’s not enough. Markets will see such a puny move and immediately discount it, expecting that it will be followed by another quarter percent later, and then another, in a series of ratchets. With such assumptions “baked into the cake,” as it were. Big-money-manager behaviors won’t change, and the rate hikes essentially will be “priced in” to expectations for an inflationary spiral.

What’s needed is a shock to the system — and better to do it now, when rates remain at such historically low levels and markets can handle the pain. An immediate hike of at least 150 basis points could help suffocate monetary inflation while avoiding the need for further hikes down the road. Interest rates would rise sharply, but they would remain lower than they were for the vast bulk of the 50-year period ending in 2010…. [The full column is here.]


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