💸 Welcome to Inflation Nation

Issue 1: What actually caused inflation?

Good afternoon,

Welcome to AIER's Inflation Nation. My name is Thomas Hogan and I'll be your guide throughout this 5-part series on the topic we all wish wasn't so newsworthy...inflation.

Everyone in America just got an automatic pay cut as inflation reached its highest point in over 40 years. Prices of basic goods have skyrocketed. Gas prices have risen by 44% over the past year, while food prices have increased 10.9%. The average prices of furniture and bedding have risen by 14.8%, and housekeeping supplies by 11.0%. Items like apparel, appliances, and medical services are all up 5% or more.

Yet the headlines keep chasing three bogeymen and missing the real issue.

Fed Chair Jerome Powell — chair of the Federal Reserve, which manages the money supply for the entire country — said recently, "I think we now understand better how little we understand about inflation..." To make matters worse, despite being Vice President through the Great Recession, President Joe Biden still doesn't understand inflation.

So, even though you are probably familiar with inflation basics, let's start by defining a few terms.

inflation

a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services.

consumer price index (CPI)

the most common measure of inflation. It indexes the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

core personal consumption expenditures price index (Core PCE)

the Federal Reserve’s preferred measure of inflation. Core PCE excludes two categories – food and energy – where prices tend to swing up and down more dramatically and more often than other prices. This makes it easier to see the underlying inflation trend.

That's inflation in a nutshell. No matter which index you're using, the charts all look like this for 2022: 📈.

Now that we have that down, let's talk about something a bit more controversial... where did it come from? Let me introduce you to a few of the government's favorite bogeymen...

Bogeyman #1: Putin

Early in July, after the CPI hit a forty-year high, President Biden put the blame on what he calls the “Putin price hike.” Higher prices, he claims, were driven by rising international oil prices due to Russia’s invasion of Ukraine. However, Russia’s war with Ukraine has had a much smaller effect on oil prices than many people think. Russia invaded Ukraine on February 24, 2022, but most of the increase in oil prices occurred in 2021, when other consumer prices were also rising. The Russian invasion of Ukraine may have pushed up prices a bit, but this pales in comparison to our own government’s mistaken policies.

Bogeyman #2: The Supply Chain

Yes, there have been significant problems in the supply chain in the past two years. Empty shelves, predicted Halloween candy shortages, and microchip scarcity are a real drag on our economy — not to mention our daily lives. But they are not the cause of the present inflation. While supply shortages were an issue early in the pandemic, they have mostly corrected themselves. If supply disturbances were the real cause of inflation, it, too, would have worked itself out by now. Sadly, that is not the case.

Bogeyman #3: Higher Wages

Some people claim there's a wage-price spiral in which higher wages increase production costs, which causes businesses to raise prices, which in turn causes workers to demand higher wages. However, this is not the case. Wages have risen by only about 5% over the past year, which is smaller than the 8.5% increase in consumer prices. As price growth outpaces wages, inflation erodes the purchasing power of American workers. Just like Friedman argued in a 1978 debate, wage-driven inflation is a myth.

Each of these factors might influence inflation in some way, but none of them is influential enough to be the scapegoat the White House was looking for. So what really caused inflation?

The answer is actually pretty simple — it's the Fed. We'll get into why in the next issue.

Since you can't trust the mainstream headlines, here are three inflation indicators to watch for yourself:

You can monitor changes in the CPI directly on the U.S. Bureau of Labor Statistics website. The CPI is updated once a month.
New figures for the Core PCE Price Index are also released monthly, and you can see them for yourself on the Bureau of Economic Analysis website.
Of course, you can always check AIER’s Everyday Price Index, which focuses on prices of important items consumers use most.

Until next week,

Thomas Hogan, Ph.D.

Senior Research Faculty

AIER

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