Published: June 2023 In prior articles and newsletters, I’ve explored the causes of consumer price inflation over time. In short, the rate of consumer price inflation in an economy comes from a combination of 1) money supply growth and 2) significant changes in productivity and/or resource abundance. -Periods of fast bank lending or large monetized […]
I’m becoming more and more convinced that we (including economists) don’t really understand inflation. It seems to be a product of the zeitgeist. If we believe there is inflation it will be their, if we don’t, it won’t. That is at least the case for the demand side of the equation. The supply side of the equation is affected by scarcity, either man made or natural. I don’t think money supply or interest rates have nearly as much effect as we’ve long believed.
Economists admit they don’t understand the causes of inflation, but they have some understanding why they can’t understand it.
One of the main drivers of inflation is inflation expectations. If people (and investors, and companies, and countries, etc.) expect inflation and rates to go up, they will spend cash now instead of holding it. This itself of course drives inflation! And likewise if they expect inflation and rates to go down they’ll hold cash and and bonds instead of investing in securities which might devalue during an economic slowdown. This makes inflation a very fickle phenomenon which cannot easily be anticipated and planned for like other economic trends.