Let’s Keep in Mind - Inflation is a Monetary Phenomenon

Main content

Readers of my weekly participation in this blog may realize that I do not believe “slack” causes inflation. That is because, in the words of Nobel Prize winner Milton Friedman, inflation “always and everywhere a monetary phenomenon.” An unemployment rate below the “natural rate” won’t cause inflation; only a monetary mistake will. The Federal Reserve’s economists are always looking for the Phillips Curve, an artifact of the fixed-exchange rate monetary policy era which ended over 40 years ago. Importantly, the Wall Street Journal noted in August that Fed Governor Jerome Powell has enlisted the support of Johns Hopkins economist (and former Fed advisor), Jon Faust. In 2016, he wrote, “At last summer’s Jackson Hole conference, Jon Faust and Eric Leeper reviewed how well the best thinkers and policymakers have historically done in assessing these factors (u* and r*). The record shows essentially no relation between inflation outcomes and inflation forecasts based on real-time assessments of labor market tightness.” This refreshing line of thinking was repeated in 2017: “Taking as given that Phillips curve reasoning is correct at some level, we have from the inception of this blog pointed to overwhelming evidence that the jobs-inflation link gives rise to only weak forces, forces that can be swamped for years at a time by myriad other factors.” As the WSJ article noted, Dr. Faust posited in 2017, “We ask this. Where is the episode in which inflation jumped from persistently too low to painfully out of control without allowing ample time for a sensible, moderate, and adequate policy response?” I believe Dr. Faust, an important advisor to Powell, is keeping things on the right track.

Footer content