ECONOMIC EXPERT CURRENT ECONOMIC QUARTERLY COMMENTARY
Inflation Woes
By Kyle Lauterhahn and Stan V. Smith, Ph.D.
T
he price of a muffin at my favorite convenience store is up 30 percent in recent months. But this muffin is not 30 percent larger, the blueberries are not 30 percent fresher, and the convenience store is not 30 percent more convenient. So why am I paying 30 percent more money? This price increase is the result of a reduction in the value of money, also known as inflation. Each reader has surely seen similar increases in prices at the grocery store, on restaurant menus, at the gas pump, or at the car dealership. According to the federal Bureau of Labor Statistics Consumer Price Index During 2021 average consumer prices nationwide increased by 7 percent. With prices rising by that amount, if you did not receive a pay raise of 7 percent or more from the last year you are actually getting pay cut - not fun. Some readers of this magazine may remember the high inflation of the 1970s, where inflation was in excess of 5 percent per year every year from 1973 to 1982. Due to the force of compounding, a $100 bill printed in January 1973 had only the buying power of $43.56 by January 1983. Fortunately, a host of policies and factors has kept inflation below 5 percent in each year but one from 1983 to 2020, including not exceeding 4 percent in any year from 1992 to 2020. Inflation is by no means a problem limited to the pandemic recovery era - or the disco era. In the 14th century, the King of Mali, Mansa Musa (possibly the richest single person to ever live), made the hajj trek from his kingdom in western Africa to Mecca in modern Saudi Arabia.
When the king’s caravan passed through Egypt, he added so much gold to the local economy through spending and gifts that the value of gold was depressed for a decade. A similar depression in the value of precious metals occurred in the 16th century as Spanish galleons brought gold and silver plundered from the Americas back to Europe. In both instances from centuries ago the value of money fell as the supply of money (gold and silver at the time) increased. In our modern era the culprit for inflation is likely also an increase in the supply of money. Milton Friedman, Nobel Prize winner and a professor of Dr. Smith’s at the University of Chicago, once said that “Inflation is always and everywhere a monetary phenomenon.” Dr. Friedman is notable for contributions to the economic school of “Monetarism” and the quantity theory of money. In the formula for the quantity theory of money, inflation across the economy is a function of the quantity of money and the speed at which money is spent. From March 2020 through March 2022 the Federal Reserve made purchases of mortgage-backed bonds of over $2.5 trillion. In 2020 President Trump signed three separate pandemic-related stimulus spending bills totaling $3.6 trillion. In March 2021 President Biden signed pandemic-related spending a bill totaling $1.9 trillion. A trillion here, a trillion there, pretty soon we’re talking about real money. The inflation impact of these infusions of money have only been compounded by constricted global supply chains as a result of the pandemic.
