Inflation in the United States was over 7% in 2021. This is dramatically higher than just a couple of years ago when it was less than 2% per year.
Why did it go up? The most obvious answer – and the one consistent with an extraordinarily large amount of evidence – is the dramatic increase in the quantity of money in the economy. Effectively, this increase is similar to Milton Friedman’s hypothetical helicopter drop, in which money rains down from the skies, people pick it up and they spend it over time. The Federal Government’s stimulus payments, financed by increased government debt purchased by the Fed, were deposited directly into people’s accounts, eliminating the effort of picking up the money.
Not surprisingly, this extraordinary policy has been followed by an observed substantial increase in inflation. Given the size of the stimulus payments and the delay in spending the newfound money, there is no reason to expect inflation to slow down in the immediate future.
The Biden administration is taking credit for the stimulus payments. They should also accept blame for inflation.
“Firms raise their prices once and for all when they have less competition”
Instead, they blame greedy corporations for raising prices. These price increases are supposed to reflect monopoly power that the corporations have. The problem with this story is that corporations with monopoly power would have raised their prices already. Why wait? Firms raise their prices once and for all when they have less competition. They will not raise their prices gradually over months or years. Antitrust actions against supposedly greedy corporations will not reduce inflation.
