Inflation, money supply and spiraling expectations

November 3, 2021 5:49 PM ET

The Federal Reserve Building in Washington.


Photo:

Stefani Reynolds/Bloomberg News

John Greenwood and Steve Hanke’s claim that excessive monetary growth is the cause of the recent high inflation does not hold water (“The money tub is overflowing,” editorial, October 22). Behind the 35.7% increase in M2 money supply they cite – and attribute mostly to the Federal Reserve – is $5.5 trillion in net purchasing power injected by the federal government. This was to offset the biggest short-term hit to aggregate demand in US history. The Fed’s quantitative easing changes the form of “money” (purchasing power) created by deficits, not the amount.

If money growth were the cause of inflation, real personal consumption figures would skyrocket, but they have barely returned to the pre-Covid trend. The Consumer Price Index report finds that large relative price changes, including for energy, food and vehicles, and base effects are driving the rise in inflation. These largely correct themselves in months, not years. Inflation worries can rest easy: if high inflation threatens to become persistent because the public’s inflation expectations are rising, the Fed will retaliate with monetary tightening. Thanks to years of monetary easing, he has heaps of ammunition at his fingertips.

Paul Sheard

Harvard Kennedy School

new York

The authors present a clear picture of what triggers inflation. The excessive growth of the money supply leads them to conclude: “Persistent and not temporary inflation will accompany us for the next two to three years.

The problem with their conclusion is the implicit assumption that the Fed will engage in non-inflationary monetary policy after discovering that we are in a persistent inflationary situation. Recall that the last similar severe inflation began in the late 1960s and it took more than a decade to extinguish. Tighter monetary restraint will raise the unemployment rate and burst asset bubbles, which will then prompt the Fed to ease. Expect the Fed to stay behind the curve and persistent inflation to persist through the decade.

Em. Professor Burton Abrams

University of Delaware

Bovey, Minn.

About Mickey Levy’s “Fed Compplacency Feeds Inflation” (Original Nov. 1): Negative real interest rates, record transfer payments and expansive fiscal policy laid the groundwork for a sharp rise in inflation . Combine these with supply chain issues, work disincentives, and rising commodity and transportation costs, and you have a recipe for runaway inflation. The Fed would like to believe the problem will be short-lived, but history shows that once the consensus is that inflation persists, sellers and buyers rush to preempt further increases and the price spiral continues. .

The tipping point has been passed and the central bank’s attachment to the idea that inflation is only a transitory problem will exacerbate the problem. Does anyone remember the WIN (Whip Inflation Now) buttons from 1974?

Robert M. Sussman

Paradise Valley, Arizona.

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Appeared in the print edition of November 4, 2021 under the title “Inflation, Money and Spiraling Expectations”.

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