(Drivebycuriosity) - There is much ado about inflation. In August the inflation rate, the change of the Consumer Price Index, climbed to 3.7%, driven by the rising oil prices (cnbc ). But I believe this is a just temporary deviation from the trend to lower rates, maybe even to deflation (I explained it here ).
The software and service company Adobe reported that the online prices extended their deflationary trend (adobe ): "Online prices in August 2023 fell 3.2% year-over-year (YoY), hitting a 40-month low—and marking a full year (12 consecutive months) of YoY price decreases".
The dropping online prices are no surprise. Computers, other electronics and many more industrial products have been getting cheaper all the time, thanks to ongoing automation. Amazon and other e-commerce companies are getting more & more efficient which translates into cost savings and lower prices for goods sold online.
Since going online Amazon has been been obsessed with efficiency, cost cutting and delivering goods cheap, fast & reliably. They have been constructing a network of huge fulfillment centers which are very efficient and save a lot of costs. Customers spend less money & time when they get things delivered at home.
Amazon`s rapid growth forced competitors like Walmart & Target to act similarly and to become more efficient & to curb their prices as well (Amazon Effect). Today Shopify, Wayfair and many other e-commerce companies are competing with Amazon which forces them all to sell at relatively low prices. Even Google & Facebook want a piece of Amazon`s pie and are participating in the battle for online customers.
Before the money flood of the years 2020/21 the Amazon Effect had kept a lid on inflation by partly compensating the rising costs for services like health care & education and the climbing rents.
Helicopter Money
The still elevated high inflation rates are caused by a flood of money in the past. In 2020/21 the US government - supported by massive bond purchases by the Federal Reserve - flooded the US economy with trillions of dollars, giving the Americans enormous purchasing power. Friedman called this action prophetically helicopter money (cato ). The government money landed directly on the bank accounts of the Americans, blowing up the money volume M2 (bank notes & coins & liquid deposits at banks).
As a result in 2020 & 2021 the US money supply M2, the engine of the inflation, jumped 40% (image below). The money deluge met a constraint supply of goods & services, partly because of COVID-19 which disturbed the supply chains.
"Inflation is caused by too much money chasing too few goods and services", notice the economists at fisherinvestments. "It is no surprise that prices increased so much", comments Tyler Cowen, Professor at George Mason University (marginalrevolution).
The monetary growth already peaked in February 2021 (with plus 27%). Since then the monetary growth rates have been falling and turned negative in December 2022. In the recent months the money volume has been shrinking! In July M2 dropped 3.7% YoY ( fred.stlouisfed).
Because the inflationary money flood has receded, inflation should soon come back to the low rates we enjoyed in the decades before 2020.
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