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Inflation Myth

by Tim Nadreau, Ph.D.

You will hear a lot of people saying inflation is the result of supply chain disruptions. The figure below shows the quarterly inflation for the U.S. and Japan from 2017-2021. If inflation is the result of supply chain disruptions, why isn't Japan being affected? Are they not part of a supply chain? Other countries in Europe are seeing inflation as well, but no one is seeing the percentage growth in prices the way the U.S. is.

Source: CPI's Complete database OECD.Stat

This is not the result of bad economics, it is the result of policy absent actionable intelligence. I'm hesitant to throw Powell et al. under the buss though. We have been changing the Federal Reserve's mandate constantly. It seems like moving back to the goal of price stability and ensuring financial institutions aren't over leveraged is enough. Asking them to balance labor market conditions, consumer sentiment, housing markets, etc. results in an overidentified set of equations. Let the Fed do one task well, not 18 poorly.

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