COST-PUSH VS DEMAND-PULL 'A NONSENSE'

It has been a hot topic of debate at the Bank of Thailand recently after hints that the central bank would raise its policy rate to fight inflation.

Economists who oppose the increase have argued that such a measure would not be an effective tool. Worse, it would lead to economic recession, they argued. They said the current high inflation was from the cost-push branch of the species, resulting from high oil prices. They suggested that rate increases should be implemented only when inflation is of the demand-pull variety, caused by a rapid expansion of consumer spending. Therefore, at this time, interest rates should not be used as a tool, they argue.

Bewildered by the debate, during a recent presentation on Thailand's economy at the Stock Exchange of Thailand, an observer posed a question to Michael Ivanovitch, president of MSI Global, a US-based research firm, asking him to explain all about cost-push and demand-pull inflation.

"It is a foolish concept," said Ivanovitch, who was once an economist at the US Federal Reserve. He explained that the concept was floated in the US during the term of former president Richard Nixon in early 1970s. He suggested that anyone who finds a book talking about cost-push and demand-pull inflation should burn it. There is no such thing, he asserted. "Inflation is a monetary phenomenon and it must be tackled by monetary policy, full stop," he said.

He said it was appropriate to raise rates to curb inflationary pressure. If the growth rate slows down a bit, resulting from a rate increase, it should not be a problem for an economy.

Among central bankers, Germans are probably the most concerned over high inflation.