A Blatantly Simple Outlook on Inflation

Get this, the consumer price index (CPI) jumped significantly in the 12-month period from June 2020 to June 2022 and it was one of the sharpest CPI movements we have ever seen. How did we get here? Let’s look at the facts.

The inflationary economic environment we are now witnessing is LARGELY a result of monetary policy. Monetary Policy, a set of actions to control a nation's overall money supply, has been, what most economists would say, ‘too easy’ over the last decade. To be more specific, the Federal Reserve has either set interest rates too low or has increased the money supply too rapidly. The Fed can increase the money supply through various methods, but in this case, the increase in overall supply occurred from decreasing the reserve requirement for banks and buying bonds on the open market, both of which put more money in the hands of people. With more money in the hands of people, there is more spending, and less saving, and the result is inflated prices or "too many dollars chasing too few goods." Some experts believe that low rates played a major role, some think it was irresponsible money printing, but most argue that it was a combination of the two. Being said, it’s incredibly difficult to point to one factor as the cause of it all.

While monetary policy played a significant role in the inflationary environment we now find ourselves in, if we want to get an accurate idea of what happened, we have to point out ALL the disruptive events that contributed to it. Aside from monetary policy, the most significant of these events include the supply chain shocks we felt when the COVID-19 pandemic was in full swing, the sharp increase in oil prices due to Russia’s invasion of Ukraine, and labor shortages caused by the rise in the gig economy and flexible work demands. Ultimately, these events all contributed to one thing in particular: increasing input costs for businesses which, more often than not, lead to increasing prices.

With inflation at its highest in recent history, it will take some time for the economy to cool off. A couple of cold showers in the form of rate hikes from the Fed should slowly reduce the money supply enough to keep inflation in check, although this is easier said than done.