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.
- 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.