The Fed and Inflation
Leonardo Jia
May 13, 2022
With the consumer price index (CPI) increasing at another all-time high in four decades at 8.5%, many are wondering who it is to blame for the record-high inflation. Some point to Putin’s war in Ukraine; others look at Biden's spending. However, more people should be looking to a different cause, unrelated to wars or who the current president is: the Federal Reserve.
As the central bank of the United States, the Federal Reserve, nicknamed the Fed, is in charge of monetary policy, or policy that deals with the supply of money. During recessions, the Fed is supposed to raise the money supply to boost aggregate demand, which they have done. However, even after GDP growth returned back to normal, money supply is still ever increasing. In fact, 80% of all dollars in circulation today were printed in the last two years. When the Fed prints so much money in such a little amount of time, inflation is bound to happen. The idea is simple: the more of something you have, the lower the value of each individual thing.
Are there other possible causes of inflation? Not really. To start, the war in Ukraine has not really increased the price level by much. In February of this year, the CPI already increased by 7.9%, and the war in Ukraine bumped up the CPI by 0.6% to 8.5%, meaning most of the high prices we see now had started before the war happened. In addition, the war isn’t raising the overall price level in the US; it caused the price of certain commodities, such as gas, to increase. Then, many point to Biden’s spending. But the inflation didn’t start under him; it started under Trump back in 2020. In addition, spending only causes increases in the price level when it is paid for by newly created money from none other than the Federal Reserve. That’s why a paper comparing pre-Fed periods to the current economy finds that inflation has been higher since the introduction of the Fed.
Inflation isn’t a new phenomenon, and that’s because it isn’t guided by new events. The Fed has and always has been the source of inflation through monetary policy. When famous Nobel prize economist Milton Friedman once said, “Inflation is always and everywhere a monetary phenomenon,” he wasn’t wrong.