I can reveal that my household has now taken the sensible step on using sunflower oil for frying instead of the extra virgin olive oil which has shot up in price.
I'm sure putting up interest rates would make the problem go away.
The problem is that the concept of inflation isn't well defined to begin with. I honestly think we should just stop measuring it.
Firstly, please don't try to understand economics by watching the BBC! News stories say climate change is hurting crops therefore food inflation is caused by climate change? The media claim everything is caused by climate change. Other things they've blamed on it include: dogs having fleas, the Syrian civil war, childhood obesity (it both makes food more expensive and makes people fatter!), strengthening the Taliban, forest fires started deliberately by the US Forestry Service, delayed trains, hate speech, mass migration, mountain goats getting smaller and, obviously, COVID-19. The media love this because when people feel the world is dangerous they consume more news. It doesn't help that large swathes of the media are now being quietly funded by foundation grants tied to salaries for climate journalists, i.e. a big part of what you read about climate is "news" written by people who literally can't report anything else, on Gates Foundation payrolls:
Check the actual data (or the IPCC reports) and you'll find there's no evidence climate change is causing extreme weather or hurting crop yields, and some evidence it helps (more CO2 causes plants to grow better). The war in Ukraine has harmed food supplies and raised prices a bit but, burning fossil fuels hasn't.
Anyway, the reason the topic is so confusing is that inflation is only a well defined concept under a static market assumption, which is obviously invalid.
The "basket of goods" method struggles to handle things entering and leaving the market. Attempts to patch it up are the source of complex and hotly debated mechanisms like hedonic regression. If you have a single luxury hotel in your toy economy and it goes bankrupt because there's a drought and everyone is spending their money on newly expensive wine instead, how does that affect your equations? The "obvious" answer is that the price of that hotel just went to infinity - you can't stay there anymore no matter how much you pay - but that breaks all the calculations, so instead the hotel gets excluded from the basket. It looks like the price of wine has gone up without any other prices going down .... inflation! It doesn't make much sense though to compare today's prices with yesterday's, because the market got smaller, so you aren't comparing like with like.
Now, we can handwave that away and pretend the market is static. You say:
> If that were the sole cause, inflation would be a trivial problem to solve—simply raise interest rates.
Inflation _in a static market_ is indeed a trivial problem to solve, and governments have done exactly that many times in the past. This is why they say "inflation is always and everywhere a monetary phenomenon". But changing interest rates doesn't help in the case that the government is directly creating new money! The assumption that interest rates and inflation are tied is very heavily dependent on money being issued into circulation in the convoluted ways modern governments use, like central banks buying government bonds off retail banks, or more complex still. But the most natural way for governments to create money is to just do it, then interest rates don't matter at all! This is especially common in less developed cash economies, which is why we still talk in the west about "printing money" even though the central banks don't significantly change the money supply by printing banknotes anymore.
But again, the market isn't really static. In a dynamic i.e. real market inflation occurs in another situation even if you crack down on money printing: you're genuinely getting poorer. Then optional products exit the market and spending gets reallocated to the essentials. As above, that means they are excluded from the averaging calculations and the remaining prices rise. Inflation in this context is "real", in that it represents that you have to work harder to get less stuff. However it's pretty rare for economies in the modern era to just spontaneously get poorer outside of wars. Almost always countries getting poorer is due to governments adopting socialist policies, and those tend to be financed by money printing. Hence we can take the shortcut and say governments cause inflation - both by money printing, and by poor management of society.
Well... We had ten years of steady 2%-ish annual price rises, then the government handed out $2,000 checks to everyone, and all of a sudden everything got 20% more expensive practically overnight. The cause-effect was pretty clear. And then, the map you included shows that many countries saw inflation rates far in excess of the 7-8% typical of developed economies at the time.
A similar argument to yours applies to the 1970s, to wit that the inflation of that era was in large part caused by high oil prices rather than government fiscal or monetary policies. Likewise the "disinflation" from 1982-2020 was as much or more about globalization, offshoring, and China than anything the Fed was doing.
tldr is that while many factors besides government fiscal and monetary laxity contribute to inflation, government policies are certainly important - especially when said policies really go off the rails as in eg Venezuela or Argentina.
The next posts in this series will cover some of these points. You're right about inflation being a result of multiple causes. But you're wrong about other things.
>Well... We had ten years of steady 2%-ish annual price rises, then the government handed out $2,000 checks to everyone, and all of a sudden everything got 20% more expensive practically overnight.
Gee, do you think the pandemic may have had *something* to do with that? The month after the checks went out was the single biggest receivables to the credit card industry of all time. The next checks went mainly to back rent. This is data from the New York Fed. Those things don't contribute to inflation.
There's now reliable data that at least 1/3 of inflation was caused by corporations using the inflation excuse to hike their margins.
>especially when said policies really go off the rails as in eg Venezuela or Argentina.
Money printing is *symptom*, not a cause, of hyperinflation and usually has to do with foreign exchange rates and borrowing. Central banks don't wake up one day and decide to start "printing money" for no reason. Most money creation is through bank lending.
There's a pretty robust effort to gaslight people about these topics. Not saying you're part of it, but you many want to think about where you're getting your information.
I work in finance (part of the problem lol) so it is important for reasons beyond casual interest that I have an accurate mental model of the dynamics involved. But inflation is certainly a complex topic, and each historical moment is in many respects unique.
As you have pointed out, inflation can be caused by disruptions to the supply/production of key goods or inputs. All I'm saying is that government policy can be (and almost always is in the outlier cases like Argentina, Venezuela, Zimbabwe, Turkey et al) a cause of those disruptions. Monetary policy in the major developed economies is focused on a special case of "supply disruption" when the economy is operating at maximum capacity, observable by low unemployment rates, but continues to be stimulated by injections of new money - either bank lending directly to consumers & businesses, or large government fiscal deficits as was the case in 2020-22. (QE is an asset swap and affects the maturity of investment portfolios and thereby the demand for investment assets, but not directly consumer prices, in contrast to what many expected in the 2010s)
When you have something like climate change, pandemic, war, or an Arab oil embargo structurally raising the costs of many critical inputs across the board, the government basically faces the choice to let the hit fall more narrowly on the main users/consumers of those products, with some knock-on effects to broader economic activity, or inject more money into the system to maintain employment while lowering average living standards (spreading the pain) via inflation and falling real wages. Stimulus also enables the government to prioritize projects or groups to receive first call on newly-printed money, and is thus a kind of rationing system amidst scarcity (relevant especially in cases of war). There is an honest debate to be had about the appropriate balance between these differing approaches at any given historical moment. What happened in 2020-21 is that governments (especially the US) kept up too much fiscal stimulus for too long and thereby ran into labor-market limits, which can't be blamed on the pandemic or the "supply chain crisis" that is still being used in some places as an excuse for poor service.
I can reveal that my household has now taken the sensible step on using sunflower oil for frying instead of the extra virgin olive oil which has shot up in price.
I'm sure putting up interest rates would make the problem go away.
The problem is that the concept of inflation isn't well defined to begin with. I honestly think we should just stop measuring it.
Firstly, please don't try to understand economics by watching the BBC! News stories say climate change is hurting crops therefore food inflation is caused by climate change? The media claim everything is caused by climate change. Other things they've blamed on it include: dogs having fleas, the Syrian civil war, childhood obesity (it both makes food more expensive and makes people fatter!), strengthening the Taliban, forest fires started deliberately by the US Forestry Service, delayed trains, hate speech, mass migration, mountain goats getting smaller and, obviously, COVID-19. The media love this because when people feel the world is dangerous they consume more news. It doesn't help that large swathes of the media are now being quietly funded by foundation grants tied to salaries for climate journalists, i.e. a big part of what you read about climate is "news" written by people who literally can't report anything else, on Gates Foundation payrolls:
https://apnews.com/article/science-business-arts-and-entertainment-journalism-united-states-087d1d5dd7189c529fe5d7a21a1ffb5f
Check the actual data (or the IPCC reports) and you'll find there's no evidence climate change is causing extreme weather or hurting crop yields, and some evidence it helps (more CO2 causes plants to grow better). The war in Ukraine has harmed food supplies and raised prices a bit but, burning fossil fuels hasn't.
Anyway, the reason the topic is so confusing is that inflation is only a well defined concept under a static market assumption, which is obviously invalid.
The "basket of goods" method struggles to handle things entering and leaving the market. Attempts to patch it up are the source of complex and hotly debated mechanisms like hedonic regression. If you have a single luxury hotel in your toy economy and it goes bankrupt because there's a drought and everyone is spending their money on newly expensive wine instead, how does that affect your equations? The "obvious" answer is that the price of that hotel just went to infinity - you can't stay there anymore no matter how much you pay - but that breaks all the calculations, so instead the hotel gets excluded from the basket. It looks like the price of wine has gone up without any other prices going down .... inflation! It doesn't make much sense though to compare today's prices with yesterday's, because the market got smaller, so you aren't comparing like with like.
Now, we can handwave that away and pretend the market is static. You say:
> If that were the sole cause, inflation would be a trivial problem to solve—simply raise interest rates.
Inflation _in a static market_ is indeed a trivial problem to solve, and governments have done exactly that many times in the past. This is why they say "inflation is always and everywhere a monetary phenomenon". But changing interest rates doesn't help in the case that the government is directly creating new money! The assumption that interest rates and inflation are tied is very heavily dependent on money being issued into circulation in the convoluted ways modern governments use, like central banks buying government bonds off retail banks, or more complex still. But the most natural way for governments to create money is to just do it, then interest rates don't matter at all! This is especially common in less developed cash economies, which is why we still talk in the west about "printing money" even though the central banks don't significantly change the money supply by printing banknotes anymore.
But again, the market isn't really static. In a dynamic i.e. real market inflation occurs in another situation even if you crack down on money printing: you're genuinely getting poorer. Then optional products exit the market and spending gets reallocated to the essentials. As above, that means they are excluded from the averaging calculations and the remaining prices rise. Inflation in this context is "real", in that it represents that you have to work harder to get less stuff. However it's pretty rare for economies in the modern era to just spontaneously get poorer outside of wars. Almost always countries getting poorer is due to governments adopting socialist policies, and those tend to be financed by money printing. Hence we can take the shortcut and say governments cause inflation - both by money printing, and by poor management of society.
Well... We had ten years of steady 2%-ish annual price rises, then the government handed out $2,000 checks to everyone, and all of a sudden everything got 20% more expensive practically overnight. The cause-effect was pretty clear. And then, the map you included shows that many countries saw inflation rates far in excess of the 7-8% typical of developed economies at the time.
A similar argument to yours applies to the 1970s, to wit that the inflation of that era was in large part caused by high oil prices rather than government fiscal or monetary policies. Likewise the "disinflation" from 1982-2020 was as much or more about globalization, offshoring, and China than anything the Fed was doing.
tldr is that while many factors besides government fiscal and monetary laxity contribute to inflation, government policies are certainly important - especially when said policies really go off the rails as in eg Venezuela or Argentina.
The next posts in this series will cover some of these points. You're right about inflation being a result of multiple causes. But you're wrong about other things.
>Well... We had ten years of steady 2%-ish annual price rises, then the government handed out $2,000 checks to everyone, and all of a sudden everything got 20% more expensive practically overnight.
Gee, do you think the pandemic may have had *something* to do with that? The month after the checks went out was the single biggest receivables to the credit card industry of all time. The next checks went mainly to back rent. This is data from the New York Fed. Those things don't contribute to inflation.
There's now reliable data that at least 1/3 of inflation was caused by corporations using the inflation excuse to hike their margins.
>especially when said policies really go off the rails as in eg Venezuela or Argentina.
Money printing is *symptom*, not a cause, of hyperinflation and usually has to do with foreign exchange rates and borrowing. Central banks don't wake up one day and decide to start "printing money" for no reason. Most money creation is through bank lending.
There's a pretty robust effort to gaslight people about these topics. Not saying you're part of it, but you many want to think about where you're getting your information.
I work in finance (part of the problem lol) so it is important for reasons beyond casual interest that I have an accurate mental model of the dynamics involved. But inflation is certainly a complex topic, and each historical moment is in many respects unique.
As you have pointed out, inflation can be caused by disruptions to the supply/production of key goods or inputs. All I'm saying is that government policy can be (and almost always is in the outlier cases like Argentina, Venezuela, Zimbabwe, Turkey et al) a cause of those disruptions. Monetary policy in the major developed economies is focused on a special case of "supply disruption" when the economy is operating at maximum capacity, observable by low unemployment rates, but continues to be stimulated by injections of new money - either bank lending directly to consumers & businesses, or large government fiscal deficits as was the case in 2020-22. (QE is an asset swap and affects the maturity of investment portfolios and thereby the demand for investment assets, but not directly consumer prices, in contrast to what many expected in the 2010s)
When you have something like climate change, pandemic, war, or an Arab oil embargo structurally raising the costs of many critical inputs across the board, the government basically faces the choice to let the hit fall more narrowly on the main users/consumers of those products, with some knock-on effects to broader economic activity, or inject more money into the system to maintain employment while lowering average living standards (spreading the pain) via inflation and falling real wages. Stimulus also enables the government to prioritize projects or groups to receive first call on newly-printed money, and is thus a kind of rationing system amidst scarcity (relevant especially in cases of war). There is an honest debate to be had about the appropriate balance between these differing approaches at any given historical moment. What happened in 2020-21 is that governments (especially the US) kept up too much fiscal stimulus for too long and thereby ran into labor-market limits, which can't be blamed on the pandemic or the "supply chain crisis" that is still being used in some places as an excuse for poor service.