Inflation by the Numbers
John Mauldin John Mauldin
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Thoughts from the Frontline
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December 17, 2021
Milton Friedman famously said inflation is “always and everywhere a monetary phenomenon.” He was right but that short statement doesn’t fully explain how inflation works. It has other causes, too. The period in which he did his most famous research showed inflation was clearly a monetary phenomenon, but I’m not sure he would make the same assertion today.
Last week’s What Really Caused Inflation letter generated an unusual number of questions and comments. That tells me I need to go a little deeper. We know inflation by the higher prices it generates, but exactly how it flows through the economy isn’t always obvious.
Policy Error
The current episode of inflation we have is unlike anything we’ve seen in modern history. It has three component causes, all equally culpable.
First, there is the Federal Reserve’s easy monetary policy. Quantitative Easing caused asset price inflation in both financial assets and home prices. Low interest rates have spurred increases in home prices, rental property prices, new/used cars, and have clearly contributed to the financialization of the economy.
Low interest rates encouraged investors, both small and large, to reach for yield and take more portfolio risk. Small investors in particular have moved into riskier stocks. If we have a bear market in an inflationary cycle, it will devastate the retirement portfolios of many retirees and those who are close to retirement.
Pretty much no one (except frustrated buyers) is upset when their home or stocks go up in price. Clearly, the Federal Reserve has made that a feature of their policy. They think of it as financial stability.
The problem is that there are many aspects of inflation monetary policy can’t control. We will continue seeing headline CPI and PCE inflation numbers well above their 2% target (which is in and of itself destructive) which means that if the Federal Reserve wants to maintain its inflation-fighting credibility, it will have to go further than anyone thinks now, or lose that credibility. And that risks (gasp!) a recession.
https://www.mauldineconomics.com/frontlinethoughts/inflation-by-the-numbers
