The US Federal Reserve is aiming its powerful firehose at the living room but it’s the forest that’s ablaze. As a result, people may drown even as their house catches fire.

This about sums up the sorry state of inflation-fighting in America.

On Wednesday, the Fed – America’s central bank – raised interest rates by three-quarters of a percentage point, and signaled more rate increases to come, perhaps as soon as September.

This followed a quarter-point increase in March, another half a point in May, and three-quarters of a point in June.

On Thursday, the commerce department announced that the US economy had shrunk for the second quarter in a row.

While not technically a recession (economists in and out of the White House have spent much of the last several days deconstructing the word “recession”), there’s no question but that the US economy is slowing.

This, to put it mildly, makes no sense.

Inflation has broken out all over the world – the consequence of pent-up demand from more than two years of pandemic and of limited supplies of everything from computer chips to wheat, due to difficulties getting the world economy up and running.

Add in Putin’s war in Ukraine driving up world energy and food prices, and China’s lockdowns against Covid, and you get a perfect conflagration.

That’s not all. Big corporations are busily raising their prices because consumers have so little choice. Corporations are using inflation as cover.

Prices at the gas pump have drifted down a bit in the last month but are still eye-popping. (Here in California, I’m paying over $6 a gallon.)

At the same time, big oil has hit a gusher. Exxon just reported second-quarter profits of $17.9bn, more than three times what it earned a year ago. Chevron’s profit more than tripled to $11.6bn.

The two giant American oil companies aren’t pouring their profits back into energy, green or otherwise. They’re buying back their shares of stock to reward investors and executives.

Or consider giant corporations selling consumer staples, such as Proctor & Gamble (maker of everything from Gillette razors to Tide detergent).

On Friday, P&G reported another quarter of rising profits despite the increasing costs of raw materials and transportation. How did it manage this feat? By raising its prices even more.

Meanwhile, half of the recent rise in grocery prices is from beef, pork and poultry. Just four large conglomerates control these markets, and they’ve been coordinating their price increases to score large profits – here again, using “inflation” as an excuse.

If markets were competitive, companies would keep their prices down to prevent competitors from grabbing away customers. But they’re raising prices even as they rake in record profits.

The Fed’s firehose is hitting none of this.

Meanwhile, we’re told not to worry because the labor market is doing just fine.

Rubbish.

There are two aspects to the labor market – jobs and wages. The number of jobs has been increasing nicely. Let’s hope this continues. But hourly wages have plummeted, when adjusted for inflation.

If the Fed keeps raising interest rates – even if the national economy avoids an official “recession” – most workers will fall even further behind.

The living standards of nearly everyone who borrows money are already dropping. Because of the Fed’s rate hikes, the average rate on credit card debt has reached 17.25% (up from 16.34% in March, before the Fed began raising interest rates). Rates on student loans, car loans and mortgages are also rising.

The government should use a firehose better aimed at the conflagration, which won’t so badly burden the bottom 80%.

For starters, impose a temporary windfall profits tax on big oil, on giant sellers of consumer staples and on big ag. This would reduce their incentive to engage in price gouging.

Bolder antitrust enforcement – even the threat to block mergers and break up giant companies – could also reduce their ardor to raise prices.

If Congress refuses to allow the government to use its bargaining power to reduce the prices of pharmaceuticals, big pharma is a good candidate for temporary price controls. (FDR controlled prices via executive order.)

Finally, higher taxes on the wealthy – such as Democrats seem finally ready to enact – will help dampen total demand, thereby dousing some of the inflation fire.

The Fed’s single tool for fire-fighting – interest-rate increases – is aimed in the wrong direction. It’s hitting working people rather than corporations responsible for most price increases (over and above the rising costs of global supplies).

We need to fight rising prices, not working people.

• Robert Reich, a former US secretary of labor, is professor of public policy at the University of California at Berkeley and the author of Saving Capitalism: For the Many, Not the Few and The Common Good. His new book, The System: Who Rigged It, How We Fix It, is out now. He is a Guardian US columnist. His newsletter is at robertreich.substack.com