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I think it's unfair to pin this on the Fed. Most of the inflation appeared to come from a mix of massive fiscal stimulus and supply chains that got blown up by

I think it's unfair to pin this on the Fed. Most of the inflation appeared to come from a mix of massive fiscal stimulus and supply chains that got blown up by the pandemic, so large increases in demand coupled with decreased capacity to supply, driving up pricing for capacity. Arguably increases in some asset prices could be attributed to QE, but the story doesn't really hold water for CPI ex-housing. As an aside, I don't even think this course of events was a mistake. It was much better to have some inflation from huge stimulus but avert economic disaster, and then deal with the inflation through the relief valve of higher interest rates. There is no relief valve for total demand destruction.

adam_arthur 3y ago
While I agree that fiscal stimulus, which drove excess demand and thus shortages was the primary culprit in inflation, the Fed deserves more blame due to having the ability to unilaterally make the decision to intervene, yet choosing not to. The bar for getting something passed in congress is much higher. Powell was also publicly requesting congress to pass a second (or was it third?) massive stimulus after the economy was already on a strong path to recovery. Since then he's declined to comment on fiscal policy, even when it was clear that fiscal policy was driving inflation. https://rooseveltinstitute.org/2021/02/25/fed-chair-powell-makes-the-case-for-stimulus/ https://rooseveltinstitute.org/2021/02/25/fed-chair-powell-m...
smileysteve 3y ago
Some of the volatility can be blamed on the Fed; It's a major component of the money supply that is less bureaucratic than congress. So, when Covid shutdowns hit the US, it could react (with its largest balance sheet ever), but it also could have reacted to valuation increases, it could have reacted to first and second round stimulus packages by reducing its equity holdings, it could have reacted to positivity rates and vaccine uptake. Though the lack of the legislative and executive acting in the US can be blamed as well; That could mean, incentivizing baby boomers to stay in the workforce, increasing immigration (where food, lawn maintenance, retail industries are having worker shortages as workers have moved to warehouses, technology, and delivery), or the child tax care credit helping parents stay in the workforce (possibly with more linkage to employment), and lastly temporary tariffs where possible to reduce consumer demand for imports (via ~ taxes).
kurthr 3y ago
Don't forget the Ukraine war which pushed oil and natural gas prices through the roof as travel really started to open back up. Since energy is an input to most of the economy 50-100% increases in pricing will have a significant effect, and so will 50-100% decreases (though market prices fall more slowly than costs allowing higher profits). https://www.macrotrends.net/2500/crude-oil-vs-natural-gas-chart https://www.macrotrends.net/2500/crude-oil-vs-natural-gas-ch... People who think quantitative easing is "money printing" haven't looked at how reserves work (and how circulating money is created through loans) or at the correlation of QE/QT on either inflation or deflation in the US, the EU, or Japan. Now it does increase liquidity and that may increase asset prices slowly. https://research.stlouisfed.org/publications/economic-synopses/2014/01/10/quantitative-easing-in-japan-past-and-present https://research.stlouisfed.org/publications/economic-synops... The Fed did keep rates a bit low for a while, they will also keep them a bit high for a while since they are "data driven" and the data always lags. We seem to be lucky this time that delayed infrastructure stimulus (not the pandemic business handouts) is offsetting decrease in credit, but it's unlikely "this time is different" so we'll almost certainly have a recession to kill inflation expectations and a "banking event" that causes Fed rates to fall. Interestingly, the treasury spend down caused by debt ceiling shenanigans seems to have lowered long term rates for a few months which also helped loans/spending in the short term.
- helij 3y ago
  I remember energy providers here in the UK went under way before Ukraine war because of electricity price spike. When war started we had another spike but it was short and prices are now at the same level as before the war but still higher than in July 2021. Some data here: https://www.ecb.europa.eu/pub/economic-bulletin/focus/2022/html/ecb.ebbox202204_01~68ef3c3dc6.en.html https://www.ecb.europa.eu/pub/economic-bulletin/focus/2022/h... Why is the narrative everywhere still that prices are higher because of the war in Ukraine?
  - blitzar 3y ago
    Because the true reason is political, and politicians are the ones writing the narrative.
curiousgeorgio 3y ago
> ... a mix of massive fiscal stimulus and supply chains that got blown up by the pandemic If pandemic-related supply chain issues are really a major factor in the inflation we're seeing, with time we'd expect most prices to be returning to pre-pandemic levels, or at least close. I don't think I've heard anyone seriously suggest that could happen. Instead, we're celebrating a small reduction in the slope of a line that has been and continues to be moving up at an alarmingly steep angle. And while you could argue that fiscal stimulus isn't a direct action from the fed, it's certainly related and can ultimately be attributed to the same group of delusional people in the driver's seat.
mint2 3y ago
A major factor is missing - lack of competition due to decades of unrestrained mergers allowed large price increase sending corporate profits to record levels

adam_arthur 3y ago

While I agree that fiscal stimulus, which drove excess demand and thus shortages was the primary culprit in inflation, the Fed deserves more blame due to having the ability to unilaterally make the decision to intervene, yet choosing not to. The bar for getting something passed in congress is much higher. Powell was also publicly requesting congress to pass a second (or was it third?) massive stimulus after the economy was already on a strong path to recovery. Since then he's declined to comment on fiscal policy, even when it was clear that fiscal policy was driving inflation. https://rooseveltinstitute.org/2021/02/25/fed-chair-powell-makes-the-case-for-stimulus/ https://rooseveltinstitute.org/2021/02/25/fed-chair-powell-m...

smileysteve 3y ago

Some of the volatility can be blamed on the Fed; It's a major component of the money supply that is less bureaucratic than congress. So, when Covid shutdowns hit the US, it could react (with its largest balance sheet ever), but it also could have reacted to valuation increases, it could have reacted to first and second round stimulus packages by reducing its equity holdings, it could have reacted to positivity rates and vaccine uptake. Though the lack of the legislative and executive acting in the US can be blamed as well; That could mean, incentivizing baby boomers to stay in the workforce, increasing immigration (where food, lawn maintenance, retail industries are having worker shortages as workers have moved to warehouses, technology, and delivery), or the child tax care credit helping parents stay in the workforce (possibly with more linkage to employment), and lastly temporary tariffs where possible to reduce consumer demand for imports (via ~ taxes).

kurthr 3y ago

Don't forget the Ukraine war which pushed oil and natural gas prices through the roof as travel really started to open back up. Since energy is an input to most of the economy 50-100% increases in pricing will have a significant effect, and so will 50-100% decreases (though market prices fall more slowly than costs allowing higher profits). https://www.macrotrends.net/2500/crude-oil-vs-natural-gas-chart https://www.macrotrends.net/2500/crude-oil-vs-natural-gas-ch... People who think quantitative easing is "money printing" haven't looked at how reserves work (and how circulating money is created through loans) or at the correlation of QE/QT on either inflation or deflation in the US, the EU, or Japan. Now it does increase liquidity and that may increase asset prices slowly. https://research.stlouisfed.org/publications/economic-synopses/2014/01/10/quantitative-easing-in-japan-past-and-present https://research.stlouisfed.org/publications/economic-synops... The Fed did keep rates a bit low for a while, they will also keep them a bit high for a while since they are "data driven" and the data always lags. We seem to be lucky this time that delayed infrastructure stimulus (not the pandemic business handouts) is offsetting decrease in credit, but it's unlikely "this time is different" so we'll almost certainly have a recession to kill inflation expectations and a "banking event" that causes Fed rates to fall. Interestingly, the treasury spend down caused by debt ceiling shenanigans seems to have lowered long term rates for a few months which also helped loans/spending in the short term.

helij 3y ago
I remember energy providers here in the UK went under way before Ukraine war because of electricity price spike. When war started we had another spike but it was short and prices are now at the same level as before the war but still higher than in July 2021. Some data here: https://www.ecb.europa.eu/pub/economic-bulletin/focus/2022/html/ecb.ebbox202204_01~68ef3c3dc6.en.html https://www.ecb.europa.eu/pub/economic-bulletin/focus/2022/h... Why is the narrative everywhere still that prices are higher because of the war in Ukraine?
- blitzar 3y ago
  Because the true reason is political, and politicians are the ones writing the narrative.

curiousgeorgio 3y ago

> ... a mix of massive fiscal stimulus and supply chains that got blown up by the pandemic If pandemic-related supply chain issues are really a major factor in the inflation we're seeing, with time we'd expect most prices to be returning to pre-pandemic levels, or at least close. I don't think I've heard anyone seriously suggest that could happen. Instead, we're celebrating a small reduction in the slope of a line that has been and continues to be moving up at an alarmingly steep angle. And while you could argue that fiscal stimulus isn't a direct action from the fed, it's certainly related and can ultimately be attributed to the same group of delusional people in the driver's seat.

mint2 3y ago

A major factor is missing - lack of competition due to decades of unrestrained mergers allowed large price increase sending corporate profits to record levels