U.S. Inflation Surge Is Harbinger of What’s to Come

The comments below are an edited and abridged synopsis of an article by Steven H. Hanke

The recent headline inflation number of 4.2% per year shocked most observers, but it wouldn’t have shocked Milton Friedman. We know that money dominates, but most people adhere to the precepts of fiscalism. Even Fed Chair Jerome Powell has confessed that the Fed pays little attention to the growth of the money supply. During congressional hearings on February 23, Powell said that the relationship between economic growth and the money supply is something we have to unlearn. It’s clear that Chairman Powell has followed his own advice. But contrary to his musings, the rate of growth in the money supply, broadly measured, dictates the course of a country’s nominal GDP growth and its inflation rate.

U.S. Inflation Surge Is Harbinger of What’s to Come | BullionBuzz | Nick's Top Six
Dollar Sign, Inflation Up Concept

To gauge the current US monetary temperature, we need a model of national income determination. A monetary approach requires the determination of the golden growth rate for the money supply (the rate that would allow the Fed to hit its inflation target of 2%) and to compare it to the actual growth rate of the money supply.

Hanke calculates the golden growth rate as follows: inflation target + average real GDP growth – average percentage change in velocity. According to his calculations, the average percentage real GDP growth from 2010 to 2020 was 1.8% and the average change in the velocity of money was -2.5%. Using these values and the Fed’s inflation target of 2%, Hanke calculated the US golden growth rate for 2010–2020 for Total Money (M4) to be 6.3%.

The growth rate in M4 skyrocketed to 28.9% per year by the end of 2020, and is still growing at 24% per year today. That rate dramatically exceeds the golden growth rate of 6.3% per year, a growth rate that would be consistent with the Fed’s inflation target of 2% per year. This means that the recent April year-over-year CPI inflation rate of 4.2% is a harbinger of what is coming in the future—more inflation.

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