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How Could Inflation Ever Be Stopped?

The benefit of every government report on inflation is to remind us how even intelligent people are often confused—even if they may have once been acquainted…

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This article was originally published by EconLog

The benefit of every government report on inflation is to remind us how even intelligent people are often confused—even if they may have once been acquainted with the economic way of thinking. I read in today’s Wall Street Journal (“Inflation Slipped in April, but Upward Pressures Remain,” May 11, 2022):

Those dynamics are pushing up wage gains—adding multiple pressures on inflation. Some employers are raising prices to offset higher labor costs. Strong wage growth and hiring are also simply putting more income in Americans’ pockets.

How can the reader untie this Gordian knot? Here is the obvious interpretation: Past inflation has led to higher wages, which lead to more price increases (more inflation) which, combined with higher consumer incomes due to higher wages, will generate more inflation. Why wouldn’t the cycle repeat? How can inflation, once begun, ever be stopped or even reduced? We are not told. But it is suggested that only the mysterious and powerful hand of government can stop it. But then, why didn’t the government’s powerful hand stop inflation before or prevent it from starting in the first place?

The idea that inflation or at least its persistence can only be caused by government creating money seems to have been forgotten if it ever was learned. The figures below from John C. Frain, reproduced from a previous post of mine, may serve to illustrate; the second figure eliminates the two top outliers of the first one. The correlation between the money stock (although an admittedly imperfect measure of the money supply) is striking.

Growth of Money Stock and Price Inflation in 87 Countries, Second Half of the 20th Century (Source: John C. Frain, “Inflation and Money Growth: Evidence from a Multi- Country Data-Set,” Economic and Social Review 35:3, [2004], 251–266)

Growth of Money Stock and Price Inflation in 85 Countries, Second Half of the 20th Century (Source: John C. Frain)

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