Some Quick Thoughts on Inflation

Money supply goes up, prices go up too

The simplest explanation for elevated inflation is that we sharply increased the money supply during the pandemic (think stimulus checks, PPP loans, etc.) and that pushed prices higher.

Yes, all the things we mentioned in this post from June—Russia invading Ukraine, supply chain issues, changing demand dynamics, etc.—made an impact, but if an exam asks, “What happens if the money supply increases 27% over a one-year period?” the correct answer is, “inflation.”

Two thoughts here:

First, it’s easy to point fingers (we have and will continue to do so). Policymakers overshot the mark by a couple trillion dollars. That’s a big miss, and there was probably a level of relief that averted an economic cataclysm without driving inflation to a four-decade high.

But the the fact that the increase in the money supply caused higher inflation doesn’t necessarily mean policymakers were wrong to miss high. How many businesses would have failed without PPP loans and propped up demand? How many homeowners would have defaulted on their mortgage without stimulus checks and expanded unemployment insurance?

Studying the pandemic-response, an important question to consider is: was too much relief more economically harmful than too little relief would have been?

Second, the money supply has started to contract. It’s fallen in four straight months and is up just 0.1% year over year. This is because of the Fed raising interest rates (our primer on how that works), and it’s no coincidence that inflation has finally started to trend lower.

Looking Ahead

We have (at least) two posts coming this week, both on Friday: our recap of the monthly jobs report, which goes out to all subscribers, and Week in Review, which is only for paying subscribers. If you want that to be you, just click below: