Wednesday, July 5, 2023

Persistent Inflation And Its Cause

 I just read an article about the reasons why inflationary pressures persist despite sharply higher interest rates.  Nowhere in the article did I see the one and only real reason for inflation: Money (duh!).

I mean, here it is in its simplistic form:

In the entire economy...

  • You have one egg and one dollar.  The maximum price for the egg is $1.
  • You have one egg and two dollars. The maximum price for the egg just went to $2.
During the pandemic, and shortly thereafter, the number of "eggs" remained more or less constant.  But the number of dollars literally exploded (see below).

Raising interest rates does not reduce the amount of dollars, it just makes them harder to borrow and, supposedly, slows down the economy, slows down demand, etc. etc.  But for as long as there are "excess" dollars out there chasing a limited amount of goods and services... inflation!

Enough said...

PS It's the same in the EU and Japan..


  1. Japan is a bad example. Their inflation rates have been hovering around 0% for the last three decades. Even recent inflation numbers may be *transitionary*. Inflation data for the first five months this year: 4.4%, 3.3%, 3.3%, 3.5%, 3.2%.

  2. You are right, Japan is a bit more nuanced. To wit, their money supply did not bump up as radically as US and Eurozone. However, after almost 30 years of constant YCC (Yield Curve Control) aka printing money constantly but not as fast as others, the doodoo is now hitting the fan. For them, 4% inflation is extremely high if it leads to sharply higher interest rate, given their enormous debt. And it will happen, since BOJ is going to abandon YCC soon.

  3. What is your opinion on the notion that companies are raising prices unnecessarily high and how might it interact with the subject of this article?

    1. By H. I think some sectors/companies are indeed taking advantage of their pricing power and are raising prices more than their costs because there is too much money sloshing about. In the end, such tactics always backfire because consumers eventually exact their revenge, particularly if/when money supply goes down.