The December 2021 all-item Consumer Price Index rose 7% since December 2021. The companion Producer Price Index was up 9% for the same period.
This data should put to rest any suggestion that inflation was beginning to wither away. What consumers in grocery stores and filling stations have known for months, politicians must now grudgingly admit: The cost of living is going up and far faster than average wage increases will cover.
It feels a little late in the game to call inflation “transitory.” On average, we average people are getting poorer.
Those who look at the economy through a monetary lens saw this coming months ago. For example, consider the February 2021 analysis of Florida State University economist Jim Gwartney, titled “This time, we’ll have inflation and here’s why.”
Gwartney looked at the amount of newly printed money that had entered the economy since COVID-19 first reared its ugly head and showed how it would later give birth to inflation. Around the same time, Johns Hopkins University economist Steve Hanke reported a similar analysis.
Monetary academics, like the rest of us, know it takes time for people to spend that much money. And folks who have worked for a living in relevant fields know that sellers trying to get more goods on the shelf more quickly to accommodate increased consumer spending often face higher costs and try to increase prices. More money in circulation enables them to do this with greater ease.
I show a crude form of this relationship between time and money in the chart below. Using Federal Reserve data, I have plotted the year-over-year percentage increase for U.S. demand deposits (money in our bank accounts) and the monthly CPI.
Inflation chartAs indicated, things get interesting about March 2020, when COVID hit hard and the Trump administration shipped out lots of newly printed money. The level of demand deposits, reflected by the solid line, rises suddenly and then grows apace as additional cash shots in the arm are injected by Trump and later by President Joe Biden.
But what about inflation? Check out the chart’s broken line showing CPI acceleration. It begins to respond about one year later. Inflation accelerates and continues to do so right up to the present moment.
What about the future? When will it end? This simple analysis shows the growth of demand deposits weakening in recent months, which hints inflation could diminish when the amount of money in our pockets is back to normal — let’s say 2023’s first quarter. But that will only hold if our federal friends slow down the printing press.
There is one last lesson to be learned from the December CPI report. Viewing inflation by way of expenditure categories tells us its pace was higher for goods than for services. For example, the 2021 price index increase for new vehicles was 11.8%. It was 7.4% for furniture, 6.5% for groceries, and 2.5% for medical care services.
There are lots of pieces to the puzzle that may explain these differences. One relates to economist Milton Friedman’s “permanent income” hypothesis. According to Friedman, we should distinguish between income viewed by consumers as temporary and permanent.
A permanent income increase, or at least one perceived that way, will cause consumers to raise consumption levels, and perhaps witness price increases, across a broad range of goods and services. Temporary income increases, like a one-time stimulus check, may cause consumers to think only about replacing major appliances, upgrading the family pickup truck, or replacing the porch furniture while maintaining permanent income-derived spending habits.
To sum things up, when we look at the latest inflation data, we can see one way in which efforts to deal with COVID-19 have been costly for all consumers, and not just those who lost work and had to rearrange their lives. The politicians were correct when they said vaccinations would not require payment and that money in the bank would help make life a little easier. But later, when confronted with evidence of rising prices, there was more than just a tendency for political leaders to lay the blame on OPEC, China, or greedy capitalists. Their own culpability with the monetary printing presses didn’t come up much.
Now it seems, the monetary chickens have come home to roost.
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, dean emeritus of the Clemson College of Business and Behavioral Sciences, and a former executive director of the Federal Trade Commission.
