For central banks, knowing whether inflation results from supply or demand is crucial

If a surge in inflation results from a sharp increase in demand for goods and services, it is normal for central banks to make monetary policy restrictive to curb demand. But if a surge in inflation results from insufficient supply (of labour, commodities, infrastructure), a more restrictive monetary policy has a massive cost in terms of production and jobs and is even counterproductive by making it harder to carry out the investments needed to grow supply. So what to make of the current surge in inflation? It results from both: Strong growth in demand for goods, due to a shift in the structure of demand from services to goods (not overall demand growth); A fall in or shortfall of supply in many areas: oil production, semiconductors, raw materials needed for the energy transition; labour in the United States and the United Kingdom. Altogether, hiking interest rates would: Have a limited effect on the structure of demand; Not lead to the abandonment of the energy transition or to a fall in the related demand for raw materials; Not drive up oil or natural gas production; Not drive up the participation rate in the United States or the United Kingdom . It would t herefore have very little effect on inflation.