Wednesday, October 17

Where Inflation Comes From

And where it's likely to go. From The Everyday Price Index ("Written by AIER Staff")
Given the monetary expansion policies pursued by the Federal Reserve in the last few years, inflation is unlikely to moderate and may even accelerate in the future. The Fed increased M1, the narrowly defined money supply that consists of currency and demand deposits only, by 14 percent in 2011 alone and by 48 percent since the start of the financial crisis in 2008.

Historically, such a large expansion of the money supply has always resulted in higher inflation. For now, most of the additional money created by the Fed is accumulating in the excess reserves held by banks. But recently banks have started lending again. Reserves have started flowing out of the banks and into the wider economy through a somewhat increased volume of consumer loans and a more dramatic increase in the volume of commercial and industrial loans. There are also some early signs of life in the housing market and therefore in mortgage-loan origination.


Chronic price inflation—even at moderate rates—leads to significant losses of buying power over time, a fact often obscured by the general focus on comparatively small monthly or annual price changes. During the past decade, the average rate of price inflation measured by the Consumer Price Index was 2.4 percent. Most people accept a 2.4 percent inflation rate as fairly tame. Yet it implies a loss of more than one-fifth of the purchasing power of the dollar over the decade.
What I'm afraid of is hyperinflation, because neither Democratic nor Republican politicians are seriously considering paying for the government spending on entitlements and defense. (via J.D. Tuccille)

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