Debunking the overhyped story that high interest rates fuel inflation
Higher levels of interest income don’t appear to be enough to move the needle on spending and inflation
The idea that high interest rates are contributing to higher inflation is in vogue nowadays.
The basic line of thinking is that higher interest rates mean more interest income for bondholders, and therefore more spending power, which can fuel price pressures.
That Warren Mosler, the godfather of Modern Monetary Theory (a school of thought that holds that government spending is constrained by real resources rather than any financial limitations) would have a relatively heterodox economic view is unsurprising. But the likes of BlackRock head of fixed income Rick Rieder are singing from a similar hymnal.
Households’ interest income from all sources is running at over $1.8 trillion annualized as of May – a hefty sum, on its face. That compares to about $530 billion in personal interest payments.
“We can both come up with a narrative of what we think the propensity is to consume out of interest income, but we're not going to know until after it happens,” said Mosler on Bloomberg’s Odd Lots podcast. “And I looked at, in prior cycles, the data was telling me that it's not zero, that there's a substantial amount that directly or indirectly does get spent.”
No arguments there, at least directionally. Even though, generally speaking, people who pay interest expense are more likely to spend an extra dollar of income than people who receive interest income.
But the problem is that interest income doesn’t appear to be that potent a channel to warrant headlines when it comes to discussions over what is and isn’t driving US spending and inflation.
Interest payments received account for just 7.6% of personal income. Further, once you adjust that for interest paid by households, the net figure is down to just 5.4% of total income – near the record low of 5.1% from 2021 and well below the long-term average of 9.5%.
“Interest income received as a share of total income is below any point in the low-rate environment after the Global Financial Crisis,” said Mayank Seksaria, head of global macro at Liberty Mutual Investments. “It’s difficult to make the case that higher payouts on money market accounts are having a big impact on spending at the macro level.”
