While the hundreds of economists employed by the Federal Reserve were apparently blindsided by the current wave of inflation, there were economists who got their predictions right. Not only have they got the overall inflation number right, but they also explained why so many others got it wrong.
Based on their calculation, they expect inflation to continue, though somewhat diminished, for perhaps two more years.
“At the end of this year, I don’t see how inflation … can be less than 7 percent,” said one of the economists, Steve Hanke, during a recent Wealthion interview.
At the end of 2023, he expects the inflation to stay elevated at about 6 percent, year-over-year.
Hanke, professor of Applied Economics at Johns Hopkins University, and John Greenwood, chief economist at Invesco in London, predicted last July that the U.S. Consumer Price Index (CPI), the most popular measure of inflation, would reach at least six percent and as much as nine percent by the end of 2021. The CPI was up 7 percent in December, year-over-year, and hit a four-decade high of 8.6 percent in May.
A lot of economists and politicians, including Fed chair Jerome Powell and President Joe Biden, have blamed idiosyncratic phenomena such as supply chain disruptions and the Ukraine war for the inflation.
These factors are secondary, according to Hanke.
“This is an old game with the White House and the Fed trying to cover their tracks,” he said in a May interview with Larry Kudlow, former economic adviser to President Donald Trump.
It’s true that the pandemic and the related lockdowns have disrupted supply chains. People spent much less on services and much more on tangible goods, which hiked demand for commodities, manufacturing, and shipping. As a result, prices of goods have appreciated much more than those of services.
It’s also true that the Ukraine war and sanctions imposed on Russia for its invasion have disrupted the oil and grain markets.
But such disruptions should only affect prices in select areas of the economy and only for a limited time. If prices rise across the board, it must be that too much new money has been printed, Hanke has argued.
“There is only one cause underlining it all and that’s an excess amount of money that’s been created,” he said.
He and Greenwood have used the analogy of a “monetary bathtub.” The water in the tub is the number of dollars newly printed by the Fed. There are three “drains”: One is the expansion of the economy. If Americans produce more goods and services and the total amount of money stays the same, prices should go down.
A certain amount of new dollars thus offsets such a price decrease. Another drain is the change in the velocity of money, which means how fast is money changing hands in the economy. In recent decades, there has been a growing trend of holding dollars, which decreases the velocity and thus offsets a certain amount of newly printed dollars. Everything else manifests as inflation.
This is an excerpt from The Epoch Times.
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