The federal government is making a huge mistake in its fight against inflation.

We’ve talked a lot about inflation recently, and how important it is for the government to help working people provide for themselves and their families as prices continue to rise. But we haven’t talked much about the one thing the federal government is actually doing to fight inflation – raising interest rates – and why that’s a terrible solution for our current predicament.

This week we want to take a look at why inflation is so bad right now, what the government is currently doing to fight it, and even more crucially, what it should be doing instead.

What’s Driving Inflation

This is not your grandpa’s inflation. In the past, we’ve seen inflation largely driven by a wage-price spiral, where prices rise, wages rise to match those higher prices, prices rise again in response, and so on. That’s not happening today.

Workers may be earning more, but not much more. The arguments that increases in worker compensation are the cause of inflation are absurd. Wages aren’t meaningfully contributing to inflation – they’re not even keeping up with it.

Instead, we’ve seen inflation largely driven by geopolitical factors, like the Russian invasion of Ukraine and COVID-affected supply lines, along with an unhealthy dose of corporate greed.

As we’ve outlined in the past, corporations have been using the cover of pandemic-related global supply chain issues to drastically raise prices. Companies have indeed faced higher production costs, but they’ve used this and the general hype over inflation as cover to raise their prices even higher and price-gouge consumers, earning record profits in the process. Just today, Shell reported $9.5 billion in profits for this year’s third quarter, compared to $4.1 billion in the same quarter last year. Is it any wonder that gas prices are so high?

A few months back, The Economic Policy Institute analyzed pricing data to understand what’s driving inflation and found that over half (53.9%) of the increase in consumer prices could be attributed to fatter corporate profits. Higher labor costs, on the other hand, explain just 7.9% of recent inflation.

This emergence of corporations taking advantage of their customers isn’t subtle – it’s happening out in the open. The Groundwork Collaborative reported on hundreds of earnings calls between companies and their shareholders and found that executives have been openly bragging about their price-gouging strategies. One CEO even said, “The longer inflation lasts and the more widespread it is, the more air cover it gives companies to raise prices.”

The result? Corporate profits are at a 70-year high.

Fighting Inflation by Killing the Economy

The traditional way the government fights inflation is through the Federal Reserve raising interest rates. But with very “untraditional” causes for the inflation we’re seeing today, this looks to be the wrong tool for the job.

Higher interest rates will not tackle the rampant corporate greed and profiteering driving inflation. What they do do, however, is make it more expensive for regular Americans to borrow money. Rising interest rates lower the demand for products by making many important financial decisions – decisions that require mortgages, car loans, and credit card payments – significantly more expensive for regular Americans. This kind of decision hurts, not helps, those currently bearing the brunt of inflation.

It’s true that raising interest rates can help to shrink inflation, but it does that by deliberately slowing down the economy. That’s why so many experts are warning of a pending recession – not because of anything inevitable, but because the Federal Reserve is deliberately steering us towards a recession in the hopes that a slower economy would mean lower inflation.

This is clearly a complicated trade-off, especially considering that the workers already suffering the most from inflation will be the first to lose their jobs or have their wages cut during a recession. So raising interest rates may limit inflation, but it does that through mechanisms that may make things worse for the average American.

(To read more on how raising interest rates is bad for American families, click here)

How We Should be Fighting Inflation

Raising interest rates may be the textbook solution to inflation, but it’s not the only one out there. If rising prices are largely caused by corporate greed, then cracking down on corporate price-gouging would go a long way toward helping lower everyday prices for working Americans without pushing the economy into a recession and driving millions into unemployment.

Democrats in Congress have already proposed a number of bills to do exactly that. One of the most important, a windfall corporate profits tax, would go a long way towards tackling one of the leading causes of inflation and send a message to corporations trying to exploit the American public.

Rep. Ro Khanna’s Big Oil Windfall Profits Tax is an example of how a windfall tax would work in practice. This bill would require large oil companies to pay a tax on half the difference between their current and their pre-pandemic average price. This would still allow major oil companies to make billions in profits, but they would be taxed a significant amount on the additional profits they’re making above pre-pandemic levels, disincentivizing them from raising prices any higher.

If you ignore corporate greed completely and look at inflation at a more basic level as a case of “too many dollars and too few goods,” the solution would be to reduce the overall amount of money circulating in the economy. We could do that by pushing the entire economy into a recession and hurting millions of Americans, or we could do it without causing any real pain for anyone by taxing the rich through proposals like Congressmen Cohen and Beyer’s Billionaire Minimum Income Tax or the End the Bracket Racket Act. This may not be the most efficient way to solve inflation, but it should certainly be considered as a way to help solve the crisis without doing any actual harm to anyone.

Even more fundamentally, we should be directly helping the poorest Americans afford a rapidly rising cost of living by increasing the minimum wage. With prices rising, minimum-wage workers have been hit harder than anyone. A federal minimum wage of just $7.25 an hour was too low back in 2009 when it was last raised, but the fact that it’s stagnated for thirteen years makes it even more inadequate.

This has always been an important fight, but inflation makes it more urgent than ever. The minimum wage is losing more purchasing power by the day, leaving low-wage workers to fall further and further behind.

We as a nation have a responsibility to ensure all Americans are fairly compensated for their work, but instead, we have allowed millions to fall into abject poverty even as they work full-time jobs. It’s unacceptable, and time for a change.

Background Reading and Resources

Who wins and who loses when the Fed hikes interest rates? | NPR

Biden touts plunging deficit as GOP prepares for spending fights | The Washington Post

The Fight Against Inflation Doesn’t Have To be Rich-People Friendly | Inequality.org

Opinion | Liz Truss in the Libertarian Wilderness | The New York Times

The Fed’s battle to fight inflation could cause more pain than higher prices | CNN Business

​​Are corporations using inflationary times to raise prices and up their profits? | NPR