About 2 years ago, inflation was just over 1%… Now, it is over 6%. When it all started, pundits and administration officials all said it was “temporary“. However, temporary seems to be in the eye of the beholder. Definitions matter, and lasting more than 2 years with no end in sight does not seem to be temporary to me.
Had a discussion with a close friend last night who is convinced inflation is temporary. After about an hour of him explaining where inflation came from and what needs to change, I asked him a simple question:
“Do you believe inflation will be back down under 3% within the next 2 years?“
After some thought, his answer was “no…” So, I followed with another question:
“Do you think it will take more than 8 years to get back down to 3%?“
Again he thought, and again he said, “no…” So, he feels that inflation will return to the 3% or less range in 2 to 8 years, after already being higher for 2 years. So, now I need to ask… Is 4 to 10 years (the original 2 + 2 to 8 years) actually “temporary”?
In economics, inflation is defined as a general increase in prices and fall in the purchasing value of money. In my Economics 101 course in college, we were taught that inflation is the direct result of increased money supply; more money in the economy results in the dollar having less value or buying power… The purchasing value of money goes down as the amount of money in circulation goes up.
In 2021 and 2022, in response to the effects of COVID19 on the economy, the Federal Reserve placed large orders for the Treasury Department to print money, increasing the supply of money. Total currency in circulation increased dramatically as seen on the chart below. It is kind of difficult to see, but the increase in currency in 2020 and 2021 is quicker than the previous years.
The only way to reverse inflation then, is to stop printing so much money year-over-year. As you can see on the chart below, the Federal Reserve’s “print order” for 2023 is far less than the previous 2 years.
So, the Fed sees the problem and they seem to be making adjustments to reduce the problem. But how quickly will it curb inflation is the ultimate question. Is it too little too late?
What do you think? Please feel free to leave me a comment below…
2 responses to “Inflation”
I would argue that by the governments own admission the inflation year over year before is at least 8.7% since the social security cost of living increase was 8.7%. That’s calculated by September over previous September.
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Dave, I agree that I also saw reports of over 8%… However, when I look at the official data from the Bureau of Labor Statistics (https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths), I see only over 6% through Nov of 2022. If you can find a better official source, I’d love to see it myself.