Source: American Institute for Economic Research.
From the responses to my post on Joe Biden’s speech on the economy I get the impression that some members of the Forum audience don’t understand the inflation we are seeing today. The source article for this post may help explain our current inflation to them.
Here are the main points:
- Supply-and-demand effects cause prices to go up and down over time, but such price changes tend to be temporary.
- For prices to go up consistently the totality of money must increase in relation to the totality of goods. (That is, without more “physical” money to lock them in place, prices that rose would tend to fall.)
- The inflation we are seeing today is a consequence of government increasing the totality of money by creating and spending money into circulation.
Thus:
- You can’t blame Covid for today’s inflation because the pandemic caused both a drop in the supply of goods and a drop in the demand for goods.
- You can’t blame Putin’s war for today’s inflation, because inflation was already growing before the war due to government’s persistent creation of and spending new money into circulation.
To grasp this line of thinking, contemplate the formula M = G, where M is the totality of money and G is the totality of goods. You can certainly have price effects when M and G change, but they only become inflation when a new ratio of more M to G becomes permanent.
Tidewater News and Opinion Forum 
The thrust of this article is that the timing and strength of the Fed’s (Not Biden’s) response to the world-wide economic upheavals of pandemic and war could have been better. Hindsight is always easier than foresight. There is NOTHING in this article that allows hyperpartisans and haters to call our President a liar. In fact, even this source acknowledges the same factors that the President mentioned.
With that said, the monetary analysis presented does not explain why inflation is rampant in every country and every currency area around the world – none of whose policies are set by the Fed or by President Biden.
As the President pointed out whatever the cause of the inflation and in spite of all the finger pointing, the Republicans have not offered any kind of sensible response. They throw out brickbats but not solutions. It is all they ever do.
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RE: “With that said, the monetary analysis presented does not explain why inflation is rampant in every country and every currency area around the world – none of whose policies are set by the Fed or by President Biden.”
Inflation is not “rampant in every country and every currency area around the world.”
https://www.inflation.eu/en/inflation-rates/cpi-inflation-2022.aspx
The point of the analysis is to show how — as Milton Friedman famously said — inflation is almost always a monetary problem. To the extent that Joe Biden and others insist that today’s inflation is caused by supply disruptions, they are lying or misinformed.
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Look at your link at try average CPI inflation for 2019, before the pandemic.
You will see very low inflation compared to today.
Then compare to 2022. Huge increases worldwide.
Italy went from .61% to 5.7%, 9X, for example, and others are worse. I think we only went up 4.5X or so.
So, yes, inflation is rampant globally.
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RE: “Look at your link at try average CPI inflation for 2019, before the pandemic.”
In 2019 the range of CPI averages was 0.26% (low) to 15.46% (high). In 2022 it was 0.87% to 58%. So, yes, you can sort of say that inflation is higher everywhere in 2022. The observation, however, doesn’t tell us much.
It may seem that the pandemic is the cause of the correlation, but we’d need to evaluate every country on a case-by-case basis to rule out the more likely candidate, which is monetary effects. For example, why did inflation go down in some countries between 2019 and 2022, as it did in China?
Finally, the mere fact that the countries in the sample represent a range of inflation rates in both periods indicates that inflation is more and less severe in different places. To say that inflation is “rampant” across the board obscures this reality.
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However you parse it, the majority of countries are experiencing much higher inflation than pre-pandemic rates.
It may be monetary policy in some cases. After all, most countries had to shore up incomes for people who had nothing when lockdowns were in place.
However, car prices, for example, are all about production slowdowns for critical parts. That affects the used market as well. Same for housing as lumber went through the roof slowing new home construction and diminishing supplies. People had saved for 18-24 months, and now want to go forward. Stimulus money was not enough to buy a house, or car for that matter.
Our unemployment numbers are good, better than most for that matter. Now I realize that unemployment calculations vary among nations, but ours measured as in the past for consistency, show a very good trend @3.6% in April.
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RE: “It may be monetary policy in some cases.”
It may also be widespread reliance on an inflated U.S. dollar as a reserve currency. In that case, we may be the “badies.”
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The kind of monetary analysis you are referring to is not the only analysis of the causes of inflation. The global disruptions to supply, demand, money supplies, fiscal policies, and every other aspect of the economy caused by the global pandemic are nearly unprecedented. Then add the effects of war on food and energy supply. Trying to dismiss everything but monetary policy is at best simple-minded. And, for you to say that anyone is “lying or misinformed” because they do not accept monetarism to the extent YOU think they should, marks you as an ignoramus if not as a horse’s ass.
Besides, President Biden made it crystal clear in his speech that monetary policy is deeply involved in the problem. He made frequent reference to the Federal Reserve and its role in managing the economy. And, it is worth noting that Biden’s appointments to the Federal Reserve have been blocked for most of this year by Republican obstructionists protecting the finance industry from unwanted oversight.
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RE: “The kind of monetary analysis you are referring to is not the only analysis of the causes of inflation.”
No, it isn’t. You (and Biden), however, are claiming that supply shocks cause inflation, a claim that is contrary to mainstream economics. That’s the lie my post aims to correct.
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“That’s the lie my post aims to correct.”
There you go again. There is no LIE involved when the President talks about the conditions that have triggered the current inflation. You are a real piece of work. And not in a good way. You do not even understand the material you rely on. The claim in the piece is NOT that the federal reserve caused this inflation. The claim is that they did not respond correctly when it was set in motion by global events and made it worse.
Finally, this site does not provide “mainstream economics” analysis. Bastiat “economics” is Libertarian political preferences wrapped in a veneer of economic jargon.
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RE: “The claim in the piece is NOT that the federal reserve caused this inflation.”
The claim in the piece is as stated in the title: Supply Disturbances Do Not Explain High Inflation.
You have yet to say why the claim is wrong. Yet you persist in pretending that Biden is correct because he says today’s inflation was caused by supply disturbances.
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This piece from …”an associate professor of economics at Case Western Reserve University’s Weatherhead School of Management.” and “a senior fellow at the American Enterprise Institute and a Campbell visiting fellow at the Hoover Institution” offers some interesting insight into some of the things that can be done to fight our current inflation.
https://www.thebulwark.com/here-are-the-main-tools-for-fighting-inflation/
Outside of the tools they talk about for the Fed, POTUS and Congress, one of the most important statements in the piece is this. “While debate over precisely why inflation is so high is heated and ongoing, there is little disagreement that fiscal and monetary policy have combined over the course of the past two years to raise aggregate demand above aggregate supply. This in turn has led to rapid price increases. Other generally agreed upon contributing factors include the continuing COVID-related supply-chain problems and increases in commodity prices due to the war in Ukraine, both mentioned by Biden yesterday. For present purposes, however, what matters is not assigning blame but charting a course forward. The least painful path is to pursue policies that will expand aggregate supply.”
And to me, sub-sectionaly this: …”what matters is not assigning blame but charting a course forward.”
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RE: “The least painful path is to pursue policies that will expand aggregate supply.”
Do you know why this is the “least painful path”?
Because the alternative is to shrink the money supply (M = G) by, for example, raising interest rates. But that could cause a recession, or even a depression such that aggregate supply will actually shrink, too.
I agree that casting blame is not what matters, and Biden should avoid casting blame for today’s inflation on Covid and Putin. His only viable option is to restrain fiscal and monetary policy by, for example, not spending $40 billion on the war in Ukraine when there is an infant formula shortage.
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“I agree that casting blame is not what matters”…
Then why do you continue to do so?
And while you accuse Biden of casting blame, he is identifying where the issues started and what has contributed to them. One of the first steps to solving a problem is to identify the underlying causes. You blame Biden exclusively. I guess you have a short memory. The first stimulus was passed under Trump.
…”not spending $40 billion on the war in Ukraine when there is an infant formula shortage.”
Can’t buy what isn’t made yet. And multi-tasking is something that is done by effective leaders.
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Any president will take heat for economic woes no matter the causes.
Keeping Americans aware of causes and possible solutions is important. We can debate whether the pandemic caused it or not all day long. But the question might be phrased to “absent the pandemic, would we have a supply problem?”.
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RE: ” absent the pandemic, would we have a supply problem?”.
Maybe not, but adding trillions of dollars a year to the money supply means an inflation problem is inevitable.
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Why would we have added to the money supply without the pandemic?
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Wrong question. With or without the pandemic, increasing the money supply is a matter of choice.
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“. . . increasing the money supply is a matter of choice.”
As is every public policy decision. Are you saying it was the wrong choice when the world economy was in collapse and the money supply had shriveled because the lack of economic activity had brought the velocity to a standstill?
That is a tough sell given the outstanding success of the Biden economy.
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RE: “Are you saying it was the wrong choice when the world economy was in collapse and the money supply had shriveled because the lack of economic activity had brought the velocity to a standstill?”
When did the money supply shrivel? The reports I’ve seen show M2 increasing every year over several decades, with a big spike since Biden took office. Here, for example:
https://fred.stlouisfed.org/series/MYAGM2USM052S
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Look up velocity.
The amount of money in existence is meaningless if people are sitting on it.
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