Many media outlets and individuals seem to have taken for granted that C19 stimulus caused inflation. However, money supply has not been linked to prices for decades, with researchers unable to find a relation since the 1990s. Fed chair Jerome Powell has reminded multiple elected officials about this fact in congressional hearings. His predecessor, Alan Greenspan, also alerted Congress to the missing link between inflation and money supply. Current treasury secretary and Powell’s immediate predecessor, Janet Yellen, testified that pandemic aid was likely not to blame for inflation; pointing out high prices are global, affecting countries with differing pandemic responses.
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Since the first direct checks until now, Americans have had an extra $120 a month from pandemic payments. Though this may have changed short-term spending, it may not have impacted long-term spending or fueled world-wide price spikes. The first checks arrived a year before inflation picked up, which wasn’t until months after the last checks. Though unemployment fell below pre-pandemic levels by the end of 2021, inflation continued to ratchet upwards. Also, while bank account balances remain elevated, income savings rates have fallen below pre-pandemic levels. These conditions may signal that spending is being fueled largely from income - not stimulus checks or enhanced unemployment.
In April 2021, the CDC announced those vaccinated could travel without a C19 test, and the US passed 200 million vaccinations as shots became widely available. Inflation, along with inflation expectations, started to spike the next month. Untethered from C19 restrictions, consumers made up for lost opportunities. The tidal wave of demand would be welcome in normal conditions, but tattered supply chains couldn’t keep up. The labor force took a massive hit as many retired early, causing struggles to fill positions. Oil producers are among those citing labor and supply chain limitations. As travel rebounds, below pre-pandemic oil production has likely contributed to soaring energy costs, causing rising prices to ripple through markets. Global supply chains are further crimped by war in Ukraine and lingering international C19 lockdowns.
With demand dwarfing supply as C19 set in, mask prices rose more than three-fold. The cost of masks spiked prior to stimulus measures amid a deflationary backdrop of falling prices elsewhere with buyers sidelined by the virus. This example might illustrate how current price pressures may be related more to supply-demand imbalances and less to a stimulus-induced increase in the money supply. In addition to supply-demand dynamics, expectations themselves influence inflation. If spenders expect rising costs, they make purchases sooner before prices go even higher, further feeding inflation. Perhaps the seemingly widely accepted notion that stimulus caused rising prices helped stoke inflation itself.
July 20, 2022
Sources on money supply and inflation:
Cao, T. (2015). Paradox of Inflation: The Study on Correlation Between Money Supply and Inflation in New Era. Doctoral Dissertation: Arizona State University
Charles, S.; & Marie, J. (2020). A Note on the Competing Causes of High Inflation in Bulgaria During the 1990s: Money Supply or Exchange Rate?. Review of Political Economy, 32:3, 433-443.
Cukierman, A. (2017). Money Growth and Inflation: Policy Lessons from a Comparison of the US Since 2008 with Hyperinflation Germany in the 1920s. Economics Letters. 154. 109-112.
Hung, H., & Thompson, D. (2016). Money Supply, Class Power, and Inflation: Monetarism Reassessed. American Sociological Review, 81(3), 447–466.
Kishor, N. Kundan; & Kochin, Levis A. (2007). The Success of the Fed and the Death of Monetarism. Economic Inquiry, Western Economic Association International, vol. 45(1), 56-70.
Sumarminingsih, E.; Setiawan; Suharsono, A.; & Ruchjana, B. N. (2021). Comparison of Spatial Weights in Modeling Inflation and Money Supply Using the Spatial Vector Autoregressive Model with Calendar Variations. IOP Conference Series. Materials Science and Engineering; Bristol Vol. 1115, Iss. 1.
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