November 3, 2021 5:49 p.m. ET
John Greenwood and Steve Hanke’s claim that excessive monetary growth is the cause of recent high inflation does not hold water (“The Monetary Bathtub Is Overflowing,” op-ed, October 22). Behind the 35.7% increase in M2 money supply that they cite – and attribute mainly to the Federal Reserve – is hiding $ 5.5 trillion in net purchasing power injected by the federal government. This was to offset the biggest short-term blow to aggregate demand in US history. The Fed’s quantitative easing changes the form of the “money” (purchasing power) that deficits create, not the amount.
If money growth were the cause of inflation, real personal consumption figures would skyrocket, but they have barely returned to the pre-Covid trend. The Consumer Price Index report reveals that large changes in relative prices, especially for energy, food and vehicles, and base effects are behind the increase in the economy. inflation. These self-correct in months, not years. Inflation concerns can rest easy: If high inflation threatens to become persistent because public inflation expectations soar, the Fed will respond with monetary tightening. Thanks to years of monetary easing, he has tons of ammunition at his fingertips.