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Substantial inflation is (still) always and everywhere a monetary phenomenon.

By Chris Ball

Photo by Kelly Sikkema on Unsplash

Inflation today is 7.5%. As we suffer in stores and at gas pumps, many people wonder how this happened. Didn’t the Fed show us with our last crisis that it mastered monetary policy and could stimulate the economy then unwind before inflation set in? Was it supply chain problems? Government spending?

All the explanations bouncing around the media leave a person’s head spinning. Then the talking heads discuss Fed policy and people feel like they are trying to understand theoretical physics written in the codes of some bizarre secret society of economists and financial experts.

While the intricacies of the monetary system are indeed confusing, the cause of substantial inflation like we see today is not. When money is pouring into the economy faster than the economy is growing for long enough, you eventually get inflation.

This can be seen clearly by looking at the money supply and GDP during our most recent economic crises: the Great Financial Crisis (GFC) of 2008/09 and the Covid economic crisis of 2020. During the GFC, the Fed pumped historically high amounts of money into the economy but there was no inflation. During Covid, the Fed pumped historically high amounts of money into the economy and there is inflation.

Two things make this time different: timing and magnitude.

Let’s look at timing first. During the GFC, the money supply increased when things turned ugly and then slowed once things began to normalize. The year after the GFC, the economy grew normally and money grew by less than GDP, likely “soaking up” some of the money so we didn’t see the high inflation rates we all worried about.

During Covid, the timing was totally different. From the beginning, the money supply grew at higher and higher annual rates every quarter, right past the bottom of the recession, through the post-recession recovery and then peaked the following year when the economy was already growing strongly. Then, for all of 2021, when the economy was growing so fast that we suffered supply chain and labor shortages, the Fed still kept money growing at nearly three times the rate of GDP.

To get a sense of the magnitudes, a little history helps. The Fed was established in 1913 and its published data on the money supply (M2) starts in 1960. The highest annual growth rate of money on record for a single quarter was 13.5% in 1976 and over the whole year money grew at about double the rate of GDP. We ended the 1970s with peak inflation of 14% in 1980.

On average, since 1960, money grew annually at about 6%, plus or minus about 2%. When it hit 9 or 10%, usually just for one or two quarters, we were either fighting a recession or we were overprinting money and got inflation which is what happened in the 1970s when we did it for 10 quarters in a row.

Now, the magnitudes of money growth during the GFC were high but actually within historical bounds. The recession started officially in Q4 of 2008, hit bottom in Q2 of 2009 and Q3 was still negative, but by Q4 annual GDP growth was positive again. The annual GDP growth rates were -2.5% (2008.Q4), -3.3%, -4%, -3.1% and +0.1% (2009.Q4). In those quarters, annual money growth was 8.3% (2008.Q4), 9.6%, 9.1%, 8.2%, and 5.4% (2009.Q4). The following year, post-crisis, money grew at 2.5%, just a little less than GDP which grew at 2.7%.

Now let’s look at Covid. For the four quarters before the crisis hit, money was growing at 6% on average. GDP was growing at about 2% and inflation was also about 2%. Overall, quite normal.

Economically, Covid hit extremely hard in Q2 of 2020 with a 9% drop in annual GDP. That’s huge. It’s so huge that it distorts the numbers. Q2 ends with June and the economy grew from there, but compared year to year, it still hadn’t dug out of the initial hole and was still down -2% by year’s end. The quarterly numbers for annual GDP growth show the drop and slow return to normalcy: -9.1% (2020.Q2), -2.9%, -2.3% and 0.5% (2021.Q1).

When it comes to money growth during all of this, the numbers speak for themselves. Over the same crisis period money grew annually at 20.6% (2020.Q2), then 23.4%, 24.3%, and peaked at 25.8% (2021.Q1). That alone should strike inflation fear into the heart of anyone. Each quarter we broke historical records so that now, 25.8% is the highest ever annual growth rate of the US money supply in US Fed history.

Last year was the year of supply chain crises, labor shortages and rampant consumer demand. There is no question it was a year of extremely high aggregate demand growth and rapid GDP growth and it shows in the official GDP growth rates which started at 0.5% (2021.Q1), grew to 12.2%, then 4.9%, and finished the year at 5.5% (2021.Q2).

After the GFC, money growth was slightly less than GDP growth. Well, not this time. The annual money growth rates post-Covid recession were 25.8% (2021.Q1), 14.8%, 12.9% and 13.1% (2021.Q2). Money grew at nearly three times the rate of GDP that year. We ended 2021 nearly at the historic money growth peak last seen in 1976.

How could anyone, much less Fed officials, be surprised that this led to serious inflation? Supply chain and other challenges are important, but with regard to explaining substantial inflation, they are noise. In the words of Milton Friedman, “substantial inflation is always and everywhere a monetary phenomenon.” And this time is no different. Money grew at historically unprecedented levels relative to GDP for all of 2020 and 2021, eight quarters and counting. Substantial inflation has now arrived. How long it lasts and whether it hits 14% again lies solely in the hands of the Fed.

Chris Ball is an associate professor of economics at Quinnipiac University and a contributor to

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