(Brad Polumbo, Foundation for Economic Education) Inflation is making headlines again this week. The federal governmentās latest data show that consumer price rose 7.5 percent from January 2021 to 2022. Thatās the highest rate of price inflation weāve seen in nearly 40 years!
What does this mean for everyday American families?
A new analysis from Moodyās Analytics reports that the average US household is paying an additional $250 a month thanks to this inflation.
āA lot of people are hurting because of high inflation,ā Moodyās senior economist Ryan Sweet told the Wall Street Journal. ā$250 a monthāthatās a big burden. It really hammers home the point of āwhat is the cost of inflation?āā
This disturbing revelation brings into focus something we already knew about inflation: it hurts the working class the most. While $250 a month is hardly a noticeable increase for millionaires, that could easily strain a working-class or even middle-class familyās budget past its breaking point.
Price inflation also erodes Americansā hard-earned savings in a way thatās just as painful as the government directly hiking their taxes. As economist Ludwig von Mises colorfully put it, inflation is when āmoney, like chocolate on a hot oven, [is] melting in the pockets of the people.ā
Thatās exactly what weāre living through. But this leaves us with a more important question: Why are we seeing this surge in consumer prices? Is it some abstract economic phenomenon beyond our control? Is it due to ācorporate greed?ā
On the contrary, inflation directly traces back to decisions made by our elected (and unelected) government officials.
āThe most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague,ā Mises famously explained. āInflation is a policy.ā
The primary cause of todayās inflation is the decision by the Federal Reserve, Americaās central bank which controls the US dollar, to create trillions of new dollars out of thin air to ostensibly āstimulateā the economy during the pandemic.
Federal Reserve Chairman Jerome Powell openly admitted as much in an interview with CBS.
ā[Is it] fair to say you simply flooded the system with money?ā a reporter asked.
āYes,ā he responded. āWe did. That’s another way to think about it. We did.ā
āWhere does it come from? Do you just print it?ā the journalist followed up.
āWe print it digitally,ā Powell replied. āSo as a central bank, we have the ability to create money digitallyā¦ that actually increases the money supply. We also print actual currency and we distribute that through the Federal Reserve banks.ā
To understand what āflooding the system with moneyā looked like, just consider the following graph of the money supplyāand how dramatically it soared at the start of 2020.
How does increasing the amount of money out there lead to higher prices?
As FEE economist Peter Jacobsen has explained, āIf more dollars chase the exact same goods, prices will rise.ā
Weāre watching this Econ 101 lesson play out before our eyes. And itās a painful lesson indeed for the millions of American families that have hundreds more out of their monthly budgets just to tread water. Hereās hoping our policymakers learn from their mistakes before it even gets worse.