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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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Guest
Jun 22, 2022

Great post, Tim. I have arrived at the same conclusion. Inflation in the US is worse than it's peers because the social mandate any company SHOULD have to operate in non-existent in most large corporations. The Fed mandate seems to have been shifting to whatever the political will of the ruling party says it should be ever since Paul Volker vacated the seat. The job is to make unpopular decisions based on best economic practices, not say everything is "transitory".

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reconinsight
reconinsight
Jun 28, 2022
Replying to

Excellent point. Unpopular decisions in a populist political framework usually results in unemployment, but we need folks with shoulders broad enough to accept that responsibility. But the fed chairs also need to be willing to tell their concretional oversight committees "No. we cannot add that to our mandate." Scope creep is only happening because they don't feel capable of saying no.

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