In the latest issue of NR, I draw some lessons about the high inflation of the last few years. Among them:
“Inflation is always and everywhere a monetary phenomenon.” This was Milton Friedman’s famous claim, and it has a lot more explanatory power than the Left’s theory of corporate greed. Friedman’s statement seems, on its face, to deny the possibility that inflation could be driven by supply shortages. But even in his earliest elaboration of the proposition, Friedman makes it clear that he is talking about a “steady and sustained rise in prices.” Shortages could cause temporary price spikes, but unless they themselves grew worse in a steady and sustained way, they would not cause the type of inflation he had in mind.
The current inflation in the U.S. has conformed to Friedman’s claim. Think of inflation as “too much money chasing too few goods,” or a bit more precisely as too much spending (excess demand) chasing too few goods and services (deficient supply). Since 2019, the price level has increased by twelve percentage points more than if the 2 percent annual goal had been achieved. During the same period, spending has grown by twelve percentage points more than normal. The extra inflation has, in short, been entirely a matter of too much money.