Inflation…a Monetary Phenomenon

Posted on October 30, 2022 by admin

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” ~ Milton Friedman.

Inflation hurts all Americans and represents a crushing blow to the pocketbooks of working families and seniors living on a fixed income.

Inflation, in its most basic sense, is a lost of purchasing power. For example, a dollar held at the start of calendar year 2021 is now worth only 88.3 cents, according to .

Unfortunately, inflation seems likely to remain higher for longer than policymakers expected, and the Federal Reserve will therefore need to maintain a tighter policy stance of raising federal fund rate and quantitative tightening for an extended period of time, according to Franklin Templeton Fixed Income CIO Sonal Desai.

Consumer inflation remains at record highs across major developed economies: in September it ran at 8.2% year-over-year (Y/Y) in the United States, 10% Y/Y in the eurozone and 9.9% Y/Y in the United Kingdom (in August).1

These numbers represent inflation rates not seen in four decades. Many incorrectly assume the causes are the energy shock and supply chain disruptions which have played an important global role.

Additionally, the United States experienced a massive fiscal budget expansion during the pandemic, and fiscal stimulus continues to flow in the form of subsidies and debt forgiveness programs.

Excess demand therefore is a major inflation driver; in September, even as lower energy prices brought headline inflation down, core inflation (excluding food and energy) accelerated above expectations to 6.6%, the highest in 40 years.

Core inflation has averaged 6.2% so far this year and shows no signs of coming down—to the contrary, it’s rising. The last time it sat below 2% was in March last year.

Meanwhile, aggregate demand remains resilient and the labor market remains as tight as it’s ever been. Excess demand is an important inflation driver—as the Fed has belatedly recognized. So, the Fed can’t stop and won’t stop hiking rates anytime soon—Americans should expect that the federal funds rate could easily go above 5%.

Simply, inflation is a monetary phenomenon. It is a result of too much money, of a more rapid increase in the quantity of money than an output. “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output,” states economist Milton Friedman.

Moreover, it’s important to recognize that governments control the quantity of money. So that as a result, inflation in the United States is made and produced in Washington and nowhere else.

It is a byproduct excessive printing of green pieces of paper we call the U.S. dollar (USD) that increases the money supply, funds uncontrolled fiscal spending and devalues the fiat currency.

References:

https://www.heritage.org/budget-and-spending/heritage-explains/the-real-story-behind-inflation

Consumer Price Index (CPI) at 8.2% Inflation Rate

Posted on October 13, 2022 by admin

U.S. inflation hits 8.2% in September — hotter than expected. Core CPI surges to 6.6%, the highest since 1982.

A key consumer inflation report, the Consumer Price Index (CPI), came in hotter than expected, signaling that the Federal Reserve will likely continue with aggressive interest rate hikes. Prices consumers pay for a wide variety of goods and services rose as inflation pressures continued to weigh on the U.S. economy.

The consumer price index for September increased 0.4% for the month, according to the Bureau of Labor Statistics. On a 12-month basis, so-called headline inflation was up 8.2%, off its peak around 9% in June but still hovering near the highest levels since the early 1980s. Core CPI, which strips out volatile food and energy prices, rose to 6.6% from 6.3%. Both numbers came in higher than economists polled by the Wall Street Journal had expected.

Source: Bloomberg

The report signals that inflation is a persistent problem even amid large interest rate hikes from the central bank. Going forward, the Fed will likely have to keep delivering increases and keep rates high until there are signs that inflation is cooling off.

References:

Inflation: A Hidden Tax

Posted on September 22, 2022 by admin

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. Its a “hidden tax” on your money.

Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets.

Conversely, the same American’s paycheck covers less monthly goods, services, bills and debt payments. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power, concludes the nonpartisan Tax Foundation.

Simply, inflation occurs when there is more money for the same amount of real goods and services, which forces an increase in prices.

The way this occurs is when policymakers put more money into the economy, through either deficit-financed government spending or Federal Reserve loose monetary action, both actions can result in an increase in the money supply of an economy.

A Hidden Tax.

This means that if any other type of tax has to be levied on the general population, it must be introduced in and approved by Congress or legislatures. However, this is not the case with the “hidden tax” of inflation.

Inflation tax is not an actual statuary tax paid to a government; instead “inflation tax” refers to the penalty incurred to purchasing power for the money you’re holding at a time of high inflation.

“Inflation is the one form of taxation that can be imposed without legislation.” ~ Milton Friedman

Inflation is an extremely destructive hidden tax, especially on working families. Inflation reduces the buying power of money. Put simply, high inflation means your money is not stretching as far as it once did. As prices rises, it is felt because wages and benefits are not rising in equal measures.

References:

“Taxes now impose a greater burden on the average American household than the combined cost of food, clothing, education, and health care.”

Will Higher Interest Rates Tame Inflation?

Posted on September 21, 2022 by admin

Interest rates don’t determine inflation; the amount of money circulating in the economy determines inflation. At this point, there are over $5 trillion in excess money in the system. Brian Wesbury

While inflation roars at its highest level in four decades, President Joe Biden tried to downplay skyrocketing inflation, insisting it was only up “just an inch” in the short term.

“Well, first of all, let’s put this in perspective. Inflation rate month to month was just– just an inch, hardly at all,” President Joe Biden on Sixty Minutes

Despite the fact that consumer prices rose in August by one-tenth of a percentage point to 8.3 percent, economists had expected inflation to go down. Additionally, median inflation hit the highest level ever recorded.

The median CPI, which excludes all the large changes in either direction and is better predicted by labor market slack, is extremely ugly at 9.2% annual rate in August, the single highest monthly print in their dataset which starts in 1983 (second highest was in June).

The Federal Reserve has been raising interest rates since March to slow the economy in a bid to tame America’s worst bout of inflation in four decades. However, the data suggested that their efforts have not yet had much of an effect.

The Federal Reserve raising interest rates may reduce economic growth, make capital more expensive and may throw the US economy into recession, however there is no guarantee that these actions will tame or fix inflation, opines Brian Wesbury, Chief Economist, First Trust Advisors L. P. Interest rates, supply disruptions or Russian’s war in Ukraine don’t determine inflation; the amount of money circulating in the economy determines inflation.

“Inflation is always and everywhere a monetary phenomenon.” ~ Milton Friedman

The Fed’s balance sheet held $850 billion in reserves at the end of 2007. Today, the balance sheet is close to $9 trillion. Most of these deposits at the Fed are bank reserves which the Fed created by buying Treasury bonds, much of which was money the Treasury itself handed out during the pandemic. At this point, there are over $5 trillion in excess money in the system.

Technically, banks can do whatever they want with these reserves as long as they meet the capital and liquidity ratio requirements set by regulators.

They can hold them at the Fed and get the interest rate the Fed sets, or
They can lend them out at current market interest rates.

In turn, the big question is whether the Fed can pay banks enough to stop them from lending in the private marketplace and multiplying the money supply.

The Fed has never tried to stop bank lending in an inflationary environment by just raising the interest rate on excess reserves (IOER). Moreover, the Fed is now losing money on much of its bond portfolio because it bought so many bonds at low interest rates. At some point the Fed will be paying out more in interest than it is earning on its securities.

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today.

References:

“Taxes now impose a greater burden on the average American household than the combined cost of food, clothing, education, and health care.”

How to Protect Your Money from Inflation

Posted on September 20, 2022 by admin

Inflation causes your money to be worth less over time. To hedge against inflation, you need to invest your money in assets.

Inflation in the U.S. is at the highest rate in four decades.

Inflation decreases the purchasing power of your dollars over time. Here are steps you can take to protect the purchasing power of your dollars, according to Forbes.

Trim your expenses. To minimize the impact of inflation, review your spending and identify areas to reduce or eliminate completely.
Wait to pay off low-interest debt. Paying off debt is usually good, but you may want to hold off on making extra payments if you have low-interest debt. Your debt becomes less expensive due to inflation. Use the money for other purposes—like paying off higher-interest loans.
Invest your money. Inflation causes your savings to be worth less over time. To hedge against inflation, you need to invest your money. If the prospect of investing is scary, consider a diversified portfolio of broad market index funds to lower your risk levels and costs.

Getting inflation under control

The Federal Reserve is tasked with keeping inflation at a healthy level by adjusting the nation’s money supply and interest rates.

When the economy is expanding too quickly and inflation rises, the Fed will typically raise interest rates or sell assets to reduce the amount of cash in circulation. These actions tend to reduce demand within the economy and can push the economy into recession.

References:

https://www.forbes.com/advisor/investing/is-inflation-good-or-bad/

Federal Reserve Balance Sheet and Inflation

Posted on September 18, 2022 by admin

The U.S. Federal Reserve’s balance sheet consists of the Fed’s portfolio of U.S. Treasury and government-guaranteed mortgage-backed securities (MBS).

The balance sheet is one of the Federal Reserve’s main instruments for conducting monetary policy and for fulfilling the Federal Reserve’s dual mandate that requires it to ensure both stable prices and maximum employment.

The traditional tool the Fed used to accomplish these goals was the adjustment of the federal funds rate, the short-term interest rate that determined how much it costs for banks to lend to each other overnight.

The 2007-2008 financial crisis, however, demonstrated that even lowering the interest rate to zero was considered insufficient to shore up economies in freefall, and the Fed turned to more unusual tactics.

One of these measures was what the Fed refers to as “large-scale asset purchases,” which is more commonly known as “quantitative easing.” Just as with any other firm, securities that the Fed purchases through quantitative easing are considered assets and therefore are represented on the Fed’s balance sheet.

The value of the balance sheet of the Federal Reserve increased overall since 2007, when it stood at roughly $0.9 trillion U.S. dollars.

As of September 6, 2022, the Federal Reserve had $8.82 trillion U.S. dollars of assets on its balance sheet.

This dramatic increase can be traced back to two black swan events that had a disastrous impact on the U.S. economy:

the 2008 financial crisis and
the COVID-19 pandemic,

Both events led to a negative annual growth of the real gross domestic product (GDP) of the United States, writes Thomas Wade is the Director of Financial Services Policy at the American Action Forum. Therefore, the Federal Reserve’s response to these crises was to adopt expansionary monetary policies to stimulate employment and economic growth.

Increasing the money supply — an expansionary monetary policies which intends to increase the amount of money circulating in the economy — tends to increase inflation, states Statista.com, which destabilizes the economy and erodes purchasing power. Currently, the inflation rate in the United States reached 8.5 percent in 2022, the largest value in four decades.

Bottomline is that by expanding its balance sheet—i.e., by buying government bonds and MBS—the Fed expands the nation’s money supply in the hope of lowering interest rates and stimulating the economy; contracting the balance sheet should have the opposite effect.

However, by expanding the money supply too much, the Fed ran the risk of igniting inflation [“Inflation is one form of taxation that can be imposed without legislation.” Milton Friedman], while overly contracting it may stifle economic activity, including increasing unemployment and triggering an economic recession.

Inflation’, quipped Milton Friedman, ‘is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today.

References:

Social Security cost of living for 2023 could increase 8.7%

Posted on September 17, 2022 by admin

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. New York Times

More than 70 million Americans receiving Social Security benefits could see the largest annual cost-of-living increase in more than four decades in 2023, considering the government CPI inflation data.

The Social Security Administration will announce the formal 2023 figure around October 13, after the release of September CPI inflation data. However, the August CPI point to a Social Security cost-of-living adjustment, known as the COLA, of 8.7 percent, according to an estimate by the Senior Citizens League that lobbies for seniors and reported by The New York Times.

The COLA is calculated annually using a formula detailed in federal law. It uses one of the broadest government measures of inflation, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers‌, or CPI.‌

Social Security averages together the CPI figures during the third quarter of each year, and compares that with the previous year’s figure. For example, the 2023 COLA will be calculated by averaging together the CPI figures for the third quarter of 2022 and comparing that with the same averaged figures for 2021.

Rapid inflation typically results in trouble for equity stocks and the overall market. Financial risk assets have historically performed badly during periods of inflation, while tangible assets like real estate have held their value better.

References:

Social Security is a program run by the federal government. The program works by using Social Security taxes paid into a trust fund to provide benefits to people who are eligible. Eligibility for Social Security retirement benefits starts at age 62 (the earliest you can receive them) to age 70 (when you hit your greatest amount).

Inflation Remains at Four Decade High in August

Posted on September 15, 2022 by admin

Inflation, which is a loss of purchasing power, is likely to stay elevated thanks to a variety of structural forces.

The Labor Department reported an 8.3% year-over-year increase in the total Consumer Price Index (CPI) for August. It was a bigger gain in inflation, which is a loss of purchasing power, than expected. Economists and financial strategists agreed that the latest data show inflation is sticky.

Sticky inflation is underlying inflation, or inflation in areas where prices tend to change relatively slowly. Additionally, inflation is structural, meaning the floor is higher than many might assume, and the potential implications go beyond recession.

Vincent Deluard, director of global macro strategy at StoneX Financial, says the current period of inflation is the result of three shortages: labor, energy, and trust.

Labor. The U.S. labor market is still about seven million workers short of pre-pandemic levels.
Energy. The transition to green energy requires moving down the energy-density ladder for the first time in history, meaning the green transition will consume more resources for similar output. And, when withdraws from the strategic petroleum reserve (SPR) stops, it will remove a downward force on oil prices.
Trust. Inflation is inversely proportional to the level of trust between a country’s citizens. “Inflation is a fever that tells you an economy has an underlying ailment of weakening trust, then the fever weakens the body, and it all worsens,” opined Deluard. Inflation is “always and everywhere a psychological phenomenon,” where the problem worsens the longer it persists, Deluard states, as he modifies Milton Friedman’s take on inflation.

Additionally, the August’s CPI report puts the “peak inflation” assumption into question and shows that the labor market and demand -– not supply — problems are driving price increases.

More volatile inflation in categories such as food and energy, which economists and policy makers back out of inflation readings to get to what they call core inflation.

The Fed’s attempt to front-load interest-rate increases is one attempt to regain public trust and restore price stability. The “transitory” inflation argument that has been retired in speeches but not in spirit.

Investors, and central bankers themselves, may therefore be underestimating what the Fed must do to curb inflation, while simultaneously underestimating the odds that inflation remains well above 2% for longer.

References:

Inflation: Decline of Purchasing Power

Posted on September 13, 2022 by admin

Inflation is the decline of purchasing power of a given currency over time and it is a result of central banks printing money (increasing the money supply M2).

In 2022, inflation surged during COVID in large part due to loose money policy by the Federal Reserve, writes Brian Wesbury, Chief Economist, First Trust Advisors. It is the increase in the money supply initiated by the Fed that’s responsible for inflation.

Inflation is based on decisions made by the Federal Reserve and other sovereign central banks. It doesn’t matter whether government spending or the budget deficit is high or low, whether the labor supply is growing or shrinking, whether free trade is waxing or waning.

If the money supply grows too fast, you get more inflation; if the money supply grows too slowly or shrinks, you get deflation. If the central bank does its job right, you get stable prices, opines Wesbury.

Photo by Pixabay on Pexels.com

The Federal Reserve kept short-term rates artificially low and the M2 measure of the money supply soared. Add supply chain bottlenecks and disruptions, U.S. consumers are experiencing near double digit inflation rates. inflation problem that existed before Putin ordered the invasion of Ukraine and, we think, will continue even if the invasion (hopefully) ends.

Inflation is measured by the Consumer Price Index and the Producer Price Index. And, all eyes will be focused on inflation data as CPI is expected to be released Tuesday and PPI expected on Wednesday.

According to Bloomberg’s economists’ survey, expectations are 8.0% year over year growth in CPI and 8.8% year over year growth in PPI, these are important data points for future Fed rate hikes and are likely going to move equity markets as a result.

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.
Core CPI, which strips out the volatile food and energy components of the report and is closely tracked by the Federal Reserve
The Producer Price Index (PPI) is a group of indexes that calculates and represents the average movement in selling prices from domestic production over time. Producer Price Index represents a reading on inflation from the production side of the economy, measures the change in the prices paid to U.S. producers of goods and services,

Despite some signs inflation is abating, Federal Reserve officials have acknowledged continued tightening is likely needed to restore price stability to the central bank’s target rate.

In June 2022, the Federal Reserve (the “Fed”) raised the Fed Funds Target Rate by 75 basis point (“bps”), the largest increase since 1994. Along with a stunning large hike, there was a reiteration that reigning in of inflation was the top priority no matter the economic costs.

Central bankers, such as the Fed, have the mission and ability to adjust monetary policy so that higher inflation doesn’t result. It is ultimately the increase in the money supply that’s responsible for inflation.

Which is why inflation is going to keep exceeding the Federal Reserve’s supposed 2.0% long-term target for a long time to come until the money supply ceases growing rapidly and the Fed hikes the federal fund rates and tightens the money supply. Currently, the money supply is nowhere close to being tight and tight it will have to get in order to tame the inflation.

References:

Simple Truths about Inflation

Posted on September 3, 2022 by admin

Five simple truths embody most of what we know about inflation, according to Milton Friedman, Ph.D, American economist and a Nobel Prize in Economic recipient:

Inflation is a monetary phenomenon arising from a more rapid increase in the quantity of money than in output (though, of course, the reasons for the increase in money may be various).
In today’s world government determines – or can determine – the quantity of money.
There is only one cure for inflation: a slower rate of increase in the quantity of money.
It takes time – measured in years, not months – for inflation to develop; it takes time for inflation to be cured.
Unpleasant side effects of the cure are unavoidable.

The money supply

The money supply is the stock of money in the economy. It is determined by the roles and uses to which certain physical and financial assets are put.

Money performs a number of roles in our economy. Money functions

as a medium of exchange;
as a unit of account;
as a store of value; and
as a means of making payments inter-temporarily, i.e., over time. Its most obvious role, the one everyone is familiar with, is as a medium of exchange

The Money Aggregates (M1, M2 and M3) are money supply measures are that are meant to reflect differing roles of money;

Money Stock M1 — M1 is made up of notes and coin and several other financial instruments that the general public may not consider to be money. However, the Federal Reserve includes them because they are used as a medium of exchange and thus, on that account, perform a monetary function. Consequently, M1 is composed of currency in the hands of the public, checking accounts at commercial banks, deposit accounts against which checks can be written, and traveler’s checks issued by institutions that are not banks.

Money Stock M2 — M2 is a broader measure of the money supply than M1. It counts as money not only those financial instruments that generally act as a medium of exchange but also act as a store of value, another important function of money. Therefore, M2 includes M1 plus three other types of financial assets. These are (i) savings deposits, including money market deposit accounts; (ii) fixed deposits less than $100,000; and (iii) and retail money market mutual funds.

Money Stock M3 — M3 consisted of time deposits $100,000 and over, repurchase agreements (RPs) larger than $100,000 and longer than one day (called term RPs), and institutional money market mutual fund accounts.

Sometimes, M0 is used to denote central bank money, which consists of coin and currency in circulation, cash in bank vaults, and balances held in reserve accounts at the central bank by commercial banks and other depository institutions. In the U.S., M0 is called the “monetary base (MB).”

MI measures money used as medium of exchange, while M2 measures money used as store of value.

References:

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Category Archives: Inflation

Inflation…a Monetary Phenomenon

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