(Drivebycuriosity)
- Today we learned that the US inflation rate sank to 2.5% continuing the slow retreat of the recent months (cnbc ). That was not a surprise.
Helicopter Money
The high inflation of the recent years was caused by a deluge of money in the years 2020 & 2021, when the Biden government flooded the economy with stimulus cheques in the value of
trillions of
dollars to fight the Covid19 recession (American Rescue Plan). The
Federal Reserve financed the government cheques by massive bond purchases by the
Federal Reserve (Quantitative Easing known as QE1, QE2 & QE3).
The government money landed directly on the bank
accounts of the Americans, blowing up the money supply M2 (bank notes
& coins & deposits at banks). Milton Friedman described this as helicopter money (cato ).
( source)
( source)
As a result in 2020 & 2021 the US money supply M2, the engine of the inflation, jumped 40%. The money deluge met a constrained supply of goods &
services partly - because of Covid19. "Inflation is caused by too much money chasing too few goods and services", taught Milton Friedman.
Causal connection
The causal connection between money and inflation is known since the 16th century at least! Nicolaus
Copernicus described already in the year 1522 how "too much money"
causes inflation. Copernicus` "quantity theory of money" is based on
observations:
Early in the 16th century Spain conquered today`s Latin America and
looted the silver stocks. The Spaniards send the precious metal to Europe where
is was printed into coins and used as money.
As a result the European money supply jumped,
meeting a restrained supply of goods (agriculture, hand works) &
services. The flood of money raised suddenly the demand for scarce goods & services and caused a jump of the price level.
Elaborated studies by Milton
Friedman, Karl Brunner, Allan Meltzer and many other economists (known as Monetarists) described
already in the 1960s how and why the inflation rate follows the growth rate of money with a time lag (causal connection).
The Pull Of The Money
( source)
( source)
Fortunately the money flood ended in 2022 and the money supply shrank for a while. Since October 2023 the money volume is growing again, but only moderately.
Since
inflation follows the growth of money, the inflation rate (growth rate
of prices) will follow the pull of the slow growing money supply and the
inflation rate will continue to cool.
