The Relationship Between Supply Constraints, Price Growth, and Monetary Policy

In a supply-constrained environment, the focus may shift to slowing the rate of price growth rather than achieving a decrease in prices. This could impact the transmission mechanism of monetary policy, requiring a heavier reliance on other sectors for a broader economic slowdown if housing does not play a central role. The alignment of pricing requires balancing both supply and demand, with improvements seen in the supply chain and labor force. It is noted that relative prices can fluctuate, and achieving balance can involve various goods and services adjusting prices differently. Raising interest rates to address inflation driven by supply constraints may risk damping future expansion and investment, especially in sectors like housing where strong construction activity has been observed.