Over the last few months, debate over inflation and its impact on the U.S. economy has once again returned to the forefront. Henry Hazlitt, the famous libertarian economist, argued for a more precise definition of inflation. Read his full take in his brilliant essay “Inflation in One Page.” He further contended that inflation is due principally to an increase in the amount of money and credit. This added demand pushes prices to go up. This assumption tracks with Milton Friedman’s infamous declaration that “inflation is always and everywhere a monetary phenomenon.”
As of the end of June 2023, the money supply skyrocketed more than $600 billion since its trough earlier this year. This increase raised the M2 money supply to a mind-boggling $22 trillion. That’s more than the highest amount we ever witnessed at the peak of the pandemic. Most importantly, it showcases the unprecedented use of monetary policy as an economic stimulus. Consequently, the increase in money and credit supply has been identified as a significant driver behind rising price levels across various sectors.
The Impact of Monetary Inflation on Prices
The recent spike in producer prices is a great example of the connection between monetary inflation and price inflation. The PPI for final demand surged 0.9 percent from June to July on a non-seasonally adjusted basis. This newfound exuberance was enough to produce a spectacular 4.4 percent annualized uptick, the largest jump in six months. The reemergence of these trends has spurred fears of an unsustainable economic growth path at higher costs.
This inflationary trend hits services particularly hard. Since services account for two-thirds of U.S. consumer spending, their impact is profound. In July, final demand services had jumped 1.1 percent month-on-month. This historic surge was largely fueled by skyrocketing prices for lodging, air fare, and freight. Unlike goods, services are not taxed at the border. This produces an unusual pocket where inflation can arise without the imposition of tariffs.
Henry Hazlitt dubbed all blame for inflation on government monetary policies. He claimed that tariffs, by themselves, do not cause across-the-board price hikes. This approach underscores the far-reaching consequences of monetary policy choices. We are often left to bemoan the fact that authorities make these decisions, succumbing to such economic challenges.
Consumer Price Index Reflects Ongoing Inflationary Pressures
…price inflation has made a vigorous resurgence as evidenced by the Consumer Price Index (CPI). This data further supports concerns of the steep costs being passed on to consumers. As the economy grapples with these challenges, analysts are closely monitoring trends in both producer and consumer prices to assess their potential impact on economic stability.
After several months of CPI showing a downward trend, the tide has turned, and it won’t be long before consumers feel the pinch. Inflation is driving up costs throughout the economy. The intertwined dynamics between producer prices and consumer spending habits raise questions about future monetary policy directions and their implications for inflation control.
Real wages are falling fast Price levels are skyrocketing. This serves as a reminder that inflation deserves more serious treatment from policymakers and economists alike. Finally, monetary factors are key drivers of inflation. This underscores the importance of focusing on fiscal policies that both bring down prices and promote long-run economic growth.
Looking Ahead: Challenges and Considerations
The new economic reality has created new hurdles that must be navigated with care. The latest surge in producer prices has been even higher than forecast. This is why it’s critical that lawmakers address the systemic factors closely linked to monetary policy. This very large increase in the money supply has raised concerns about increasing inflation in the future.
As stakeholders evaluate these developments, it is essential to recognize that tariffs are not the primary culprits behind overall price increases. Rather, a more holistic understanding of monetary policy, including its implications, will offer a better guide to controlling inflation in the right ways and at the right cost.