It's been pretty taken as gospel since Milton Friedman that inflation is a monetary phenomenon.
The simple explanation for inflation is too much money chasing too few goods. That is ultimately a combination of money creation and the velocity of money.
For the longest time the velocity of the dollar was low. Which is how the Fed's quantitative easing expanded the money supply -- most of the printed money never left the financial markets--where, incidentally, there has been steady asset price inflation since 2009-2010.
The stimulus checks bypassed wall Street and injected money directly into the mainstream economy, triggering consumer price inflation.
Now we're on the verge of a wage price spiral like what we saw in the 70s, and that inflationary episode ended with Volcker taking interest rates to 20% and sending the economy into a three year recession.
If we take history as the guide, the Fed is going to have to do something similar this time, and with similar results.
There is a (mass) psychological component to it as well. If people come to believe that inflation will continue for some time, they will spend their money faster, which increases monetary velocity, and leads to further price increases. Now consider that the velocity of money has been near an all-time low since the start of the pandemic...
Yes, agreed. Velocity is a critical component. Excellent point about slow velocity during the pandemice. So lots of money creation during/ongoing coupled with higher velocity now will lead to massive inflation. (Especially if people are concerned about inflation and want to buy before prices go up!)
Inflation is strictly a monetary issue, imho...
It's been pretty taken as gospel since Milton Friedman that inflation is a monetary phenomenon.
The simple explanation for inflation is too much money chasing too few goods. That is ultimately a combination of money creation and the velocity of money.
For the longest time the velocity of the dollar was low. Which is how the Fed's quantitative easing expanded the money supply -- most of the printed money never left the financial markets--where, incidentally, there has been steady asset price inflation since 2009-2010.
The stimulus checks bypassed wall Street and injected money directly into the mainstream economy, triggering consumer price inflation.
Now we're on the verge of a wage price spiral like what we saw in the 70s, and that inflationary episode ended with Volcker taking interest rates to 20% and sending the economy into a three year recession.
If we take history as the guide, the Fed is going to have to do something similar this time, and with similar results.
There is a (mass) psychological component to it as well. If people come to believe that inflation will continue for some time, they will spend their money faster, which increases monetary velocity, and leads to further price increases. Now consider that the velocity of money has been near an all-time low since the start of the pandemic...
Yes, agreed. Velocity is a critical component. Excellent point about slow velocity during the pandemice. So lots of money creation during/ongoing coupled with higher velocity now will lead to massive inflation. (Especially if people are concerned about inflation and want to buy before prices go up!)