Signs of Monetary Inflation

Never Bark at the Big Dog. The Big Dog Is Always Right.

I have been warning about monetary inflation for months now. And now it’s here. It is still on the doorstep of our economy, but it is here.

When you monetize an economy like we have been doing this year, it is inevitable that inflation starts showing itself in the economy. There has been almost no debate over the inflation risks associated with our current monetary explosion – M1 money supply is up 53 percent in one year! – which is almost as troubling as inflation itself.

All the more reason for everyone to read the Liberty Bullhorn, of course. Click the Follow button to the right and stay informed!

We need this public conversation about inflation, and we need it now. Table 1 below reports numbers on grocery prices, indicating that inflation is already here. As explained below, this is a conditional statement, but it is a warning sign that we should take seriously – and one that Congress would have been wise to consider before they decided to add another $900 billion to the 2021 budget deficit.

Before we get to the numbers, though, I need to point out that there is a perfectly obvious explanation as to why we don’t see any debate over inflation. The economics profession is populated by econometricians who no longer have any grasp on economic theory. Those who still do understand economic theory are divided into two hapless camps: the Austrians, whose firm belief in the so-called quantity theory of money leads them to suggest that inflation is proportionate to monetary expansion in both time and quantity; and the mainstream Keynesians whose heads have recently been filled with Mad Monetary Theory.

The Austrians thought inflation was going to happen ten months ago; the Keynesians still think it will never happen. They are both wrong. Monetary inflation is not a linear phenomenon, but works like ketchup out of a bottle. You can print quite a bit of money before inflation takes off, but when it does, it is just like the ketchup: you can’t put it back in again.

It is also important to distinguish between inflation that is monetary in its origin, and the type that is driven by economic growth. Table 1 offers a good comparison of the two, reporting annual average price changes in grocery prices. Marking price increases with shades of red and price deflation with shades of blue, the table reports a concentrate of inflation to 2011. After that, there were scattered instances of sharp price hikes, with some concentration to 2014. However, for reasons we will elaborate on below the table, 2020 is the year to compare to 2011:

Table 1

Source of raw data: Bureau of Labor Statistics

In 2011 the economy was climbing back from the Great Recession. While there was nothing spectacular about GDP growth that year – less than 1.6 percent based on quarterly averages – there was a delay in the recovery of production and distribution chains. Businesses were reluctant to hire, in good part due to the sudden cost hikes from Obamacare. Nevertheless, once the economy did gear up to meet demand, the inflation pressure (at least as far as grocery prices go) subsided.

In other words, the 2011 inflation peak was driven by a growing economy. The inflation tendency in 2020, which is based on eleven months of price data, is different. Activity in the real sector, with production, employment, business investments and consumer spending, has obviously been highly unusual, primarily toward the negative side. At the same time, Congress has been pumping money out in the economy, encouraging spending while restricting – in many cases prohibiting – productive economic activity.

They have also been funding their spending incentives with newly printed money. This is a classic transmission mechanism for monetary inflation.

To make matters worse, Congress have combined their regulatory disruptions with disincentives toward productive economic activity. The unemployment bonus is a good example: give people money to spend without having to work. This practice is apparently going to continue under the new stimulus package.

It is worth noting that the 2020 price hikes we see in Table 1 in many cases cut across the year. For example, inflation in bread prices has been above six percent throughout 2020, with double digits since June. Ground chuck beef has been above seven percent every month except February, with five months in the double digits.

Prices on malt beverages, up more than three percent this year, have not increased like this in the past ten years. In November, they were up 6.4 percent. Sugar prices are also up sharply, by 6.75 percent so far this year and by more than 12 percent in November.

Meat prices – primarily steak and pork chop – have increased by their highest rates since 2014.

Fuel prices are thrown in for comparison. They are good indicators of the overall trend in economic activity: when the economy is doing well, gasoline and diesel prices tend to rise; in a slump, especially in an artificial shutdown like this year, they drop quickly. Notably, in 2011 fuel prices hiked by more than 27 percent; this year they are down by more than 23 percent.

This reinforces the point about what type of inflation we are seeing. It is not growth-driven. It is monetary.

And that, folks, should be a big, red flag for all of us. Especially Congress.

2 comments

  1. Ray Roberts

    What Austrians thought inflation was going to happen ten months ago? I never heard any Austrian say you can predict exactly when inflation will occur, only that it will inevitably occur because of FED expansionary policies.

    • S R Larson

      A guy who, day after day, walks around downtown with a sign saying “The world will end tomorrow”, will be right. Some day. Austrian economic theory works the same way. It is cogent and analytically sharp, but is almost entirely inapplicable. It can teach us a great deal about fundamental economic thought, but so long as it does not connect with the real world, it remains only a few inches this side of sophistry. In terms of inflation, Austrian theory teaches us nothing about the transmission mechanisms from money printing to real-sector prices. Therefore, it predicts that inflation will follow any time, all the time on the heels of a monetary expansion. Empirically, this is not true, which reduces Austrian theory to the guy with the sign about the end of the world.