“Supply-side inflation” is a term of deep ignorance

I was asked about the nature of inflation at the present time which apparently is being described as “supply-side driven”. Somehow it is the supply-side of the economy that is driving inflation. I suppose this is some kind of deep-state effort to subvert supply-side economics. This is what I replied.

  1. Inflation is a product of an excess in the rate of growth in the medium of exchange (all forms of domestic purchasing power) relative to the rate of growth in the goods and services available for purchase. This is neither supply side nor demand side since, as in most things in an economy, it is both sides. Or more precisely, it is everything all at once.
  2. I might add here that as a classical economist myself, inflation does not refer to movements in the price level but to government spending over and above the level of production. Since that was exactly the recipe for a Keynesian stimulus, they changed the definition of inflation in the 1930s merely to refer to an increase in the price level, and so that is what I will use as my definition here.
  3. They are trying to argue that the price level is rising because of supply constraints due to the inability of ships to land or for the goods and services to show up in retail outlets because of supply-chain deficiencies, and that it is therefore nothing to do with government policy in any narrow sense. They are therefore asking everyone to believe that when the various supply-side constraints end, that everything will go back to normal so that the price level will fall back to where it had previously been.
  4. The CPI everywhere has been distorted to suppress the evidence of price movements. The housing component in every index underestimates the contribution of  the rising cost of accommodation, which has been part of the reason that consumer prices have stayed relatively calm while housing prices have gone berserk. The reality is that there has been a fall in the ability of individuals on average incomes to buy as much as they used to, also in part because they are not permitted to because of covid. The level of demand across most economies has been flattened if not actually fallen.
  5. The question probably of most interest is what will the Federal Reserve do about interest rates? The whole thing is a mess and they have made it clear that rates will have to rise. Will they? Will they be allowed to? Will there be an almost instantaneous collapse in confidence and expenditure if they do?
  6. The Fed has allowed so much rate complacency to enter the market that my guess [a complete guess] is that the moment rates go up, business plans will go on hold all across the world. Because once rates start going up, it is impossible to know when they will have reached their highest level. The Democrats are in The White House and there is a Congressional election in November in the US. Will the Fed be willing to see the Dems routed even more than they are about to be at the coming election? They may have no choice, but in my view, if they can they will put it off as long as possible and then let the coming Republican Congress take the blame.
  7. It is all a mess. As for the term “supply-led-inflation”, it is economically meaningless. We are living in Zombie economies where it is hard to see things working out without quite a reversal before they can go forward again. The US is cushioned by hosting the world’s reserve currency, but it is only partially protected.
  8. Meanwhile, as my one further conjecture is this, that the one place purchasing power can be removed from the community with the least political pain [not no pain, but the least] is from those of us on retirement incomes. If I have to guess, and it is a guess, that it is from those of us on fixed incomes whose incomes they will try to steal from to cover the insane deficits found everywhere. But the deficits cannot disappear without a large rise in the price level.

1 thought on ““Supply-side inflation” is a term of deep ignorance

  1. Well explained. U’d make a great Monetary economist. All I can add is: Remember 2018 Fed reduced balance sheet but suddenly Sept 16 overnight repo rate went to 10%? Reality began to hit (Fed had been intervening in eco too much). Fed had to reverse course n expand bal sht again. This is proof Fed has created dependence on ultra low rates. History will repeat!

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