Economic Development

Inflation Surges to Record High

Inflation surged 6.8% from a year ago in November, the fastest increase since 1982. The Department of Labor notes that increases in food and energy prices, where prices rose the most, were the fastest 12-month gains in 13 years. Food prices increased 6.1% over the year. Energy prices have risen 33.3% since November 2020 and gasoline alone is up 58.1% from last year.

To quote Milton Friedman, “Inflation is always and everywhere a monetary phenomenon and it can be produced only by a more rapid increase in the quantity of money than in output.” This means that inflation can be brought about by faster money growth and/or slower output growth. 

Unfortunately, we have both. We have faster monetary growth thanks to expansionary monetary policy at the Federal Reserve and we have slower output growth due to supply chain bottlenecks and the labor shortages for most of 2021 thanks in large part to bonus unemployment insurance payments.

The federal government’s rampant deficit spending is partially responsible for faster monetary growth at the Federal Reserve. As noted by Economist John Cochrane, the U.S. government ran massive deficits and exploding debt for decades. This occurs because the U.S. sells treasury bonds to Federal Reserve to finance spending, increasing the stock of government debt and faster monetary growth. 

When the U.S. government issues debt, it sells treasury bonds on the open market. These bonds are purchased by the Federal Reserve and other investors. When the Federal Reserve purchases these treasury bonds it puts new money into circulation. Since 2020 and continuing today, the Federal Reserve has, “pledged to buy as much government-backed debt as needed to bolster the markets for housing and Treasury bonds.” These purchases contribute to faster monetary growth, spurring inflation. 

In addition, policymakers in Washington are tempted to pay off the debt through inflation rather than tax increases and spending cuts. “The larger the stock of dollar-denominated debt,” Economist Lawrence White warns, “the more tempting is surprise inflation as a way to pay it off quickly.”

Many readers may recall a CNBC article claiming higher wages are the “silver lining” of inflation. That’s fake news. The number on your paycheck may get bigger, but the amount of goods and services your dollar can buy is shrinking rapidly. According to the Department of Labor, gross pay increased 4.8% over the past year, but inflation-adjusted hourly earnings declined another 0.4% for November and are down 1.9% since last year.

States can ease the burden of inflation by avoiding new taxes and adhering to the ALEC Principles of Taxation to make their tax code accessible, transparent and economically neutral. Following these pro-growth principles will help families and businesses who are seeing the value of their dollar shrink before their eyes.

In Depth: Economic Development

The United States is among the most developed economies in the world. This has led to a standard of living that is simply unmatched throughout the world or throughout history. Even in such a developed and comparatively wealthy nation, policymakers still must allocate resources appropriately to encourage further economic development…

+ Economic Development In Depth