The word “inflation” often appears in the news, causing many problems. Are we experiencing inflation, or will it be fast? If so, why? Is it due to the slowdown in output and employment caused by COVID that increased federal spending? Or is it just discussing increasing federal spending to improve “infrastructure” to scare the scar market?

How about the Fed’s continued low interest rate policy of unprecedented scale and duration? Or is there an obvious shortage of gasoline, building materials and miscellaneous household products?

Start from the basics. Econ textbooks define inflation as “a rise in the overall price level” and sometimes add the adjective “continuous.” In other words, price increases must cover a wide range of projects and must continue over time.

But what is the “general price level”?

In the past, this has been controversial among economists. Must the prices of financial securities and real estate be considered, or only the prices of goods and services that have been used up and eventually depleted? What is the cost of raw materials used to purchase goods or the labor cost of the services we use?

A century ago, the great economist Irving Fisher argued that when formulating money supply and interest rate policies, the central bank must consider the widest possible range of prices, including the prices of financial and physical assets. However, Fisher lost the argument. Contemporary wisdom is that since economists cannot know the “correct” level of asset prices, they can only look at the prices of goods and services as measured by GDP.

Therefore, food, clothing, gasoline and thousands of other things used by households and businesses are used to quantify the price index of inflation. The same is true for durable items, such as household appliances, automobiles, bulldozers and electric arc furnaces. However, although we measured rents and the cost of ownership of new housing and construction material prices, we did not include changes in the market value of housing, existing buildings, commercial or agricultural land. We also don’t look at the prices of stocks and bonds.

For more than a century, we have a statistically significant effective price index for consumers and businesses. The monthly consumer price index is familiar. The original wholesale price index became the modern producer price index. However, modern watchmaking techniques can carry out a wider range of measurements. Therefore, a “GDP deflator” was compiled to measure each item in GDP. A subset, the “personal consumption expenditure” deflator, parallels the CPI. Generally, over time, older survey-based indexes and newer GDP-related indexes are closely tracked, but not necessarily month-to-month.

Some uses of structured indexes are to bypass normal human impulses to pay attention to things that harm us and ignore useful things. Rising gasoline prices sparked anger and headlines. Later, when these prices fell, almost no one noticed. A few years ago, a bird disease forced many laying hens to die, which caused egg prices to rise. Then came warnings of inflationary doom and depression.

The price of eggs is now cheaper than before the pandemic. In addition, in the past 60 years, the growth rate of eggs and almost all other basic foods has been much lower than the overall average price or average income. In the past 40 years, even though there has been an increase recently, the same is true for gasoline.

The background is very important. What happened now? Of course, the prices of many things are rising. However, many of the gains correspond to the decline that occurred when COVID-19 slowed economic growth in early 2020. People can view the change in the price index from one month to the next, then convert it to an annual interest rate and use a compound interest calculation formula. . But this will exacerbate small fluctuations. Therefore, “comparison year by year” is more common. However, during “external shocks” (such as a pandemic), these shocks may also mislead people, thereby temporarily raising or depressing prices on the other end of the comparison.

This is happening now. However, despite the indifferent performance of many economists, including Nobel Prize winners, plus Fed Chairman Jerome Powell, Treasury Secretary Janet Yellen and Joe Biden’s miscellaneous economic advisers, intermediate At some point, inflation was still worrying.

Liberal economist Milton Friedman (Milton Friedman) is the father of “monetarism” and he insists that inflation “is a monetary phenomenon everywhere.” In other words, the rapid increase in the money supply, not drought, the beef cycle contraction or the conflict in the Middle East, is the root cause of inflation. Most economists, even those who disagree with Friedman on other issues, agree that this is basically correct. Personally, I still think so.

However, it is clear that the link is not as direct or direct as previously thought. The Federal Reserve and some other central banks started to lower interest rates in 2008 for an unprecedented rate. ??To this end, they must increase their “monetary base” as never before to measure the currency in use and the “reserves” held by banks. . Reserve is money deposited but not loaned out. The money supply has also experienced similar growth, whether measured by the “M1” or the broader “M2” standard. Both measure currency in circulation and designated bank deposits.

Since then, all these measures have been greatly developed. However, we found that the cumulative increase in consumer or producer prices is small. Some economists, including former Federal Reserve Chairman Ben Bernanke, talked about “excess savings” and periods of global deflation worldwide. That is a column. Of course, one must consider how cheaply imported goods from poorer countries inhibit any domestic producer’s ability to raise prices, as they did in the 1970s.