The Inflation Iceberg Beneath The Economic Waves Of CPI

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Posted: Jun 02, 2021 11:28 AM
The Inflation Iceberg Beneath The Economic Waves Of CPI

Source: AP Photo/Richard Drew

CPI

On May 12th there was finally some of that much talked about “unity” in the country. However, unity, like everything else in life, has to be judged from a perspective of good or bad. This unity came from both left- and right-leaning news outlets. It was good; in that they all agreed that something bad just happened. It was also bad; in that something bad just happened. That bad something was the 4.2% jump in “inflation” in April as measured by the Consumer Price Index (CPI) from the Bureau of Labor Statistics (BLS). This can clearly be seen in Chart 1 below, that presents the CPI rate as a monthly percentage (%).

Chart 1: Consumer Price Index (1Y)

April’s CPI increased by almost 62% from March’s which, in turn, rose by almost 53% from February’s. And overall, CPI grew by 200% between January and April. As left-leaning media, fact checkers, and social media have been saying time-and-time-again in recent months, “context matters.” As Chart 2 below shows, CPI has been inflating for quite a long time; from at least 1974 or 1984. This time CPI is expressed as an index number (base = 100).

Chart 2: Consumer Price Index (Max)

So what is CPI exactly? The BLS defines it as: “a measure of the average change overtime in the prices paid by urban consumers for a market basket of consumer goods and services.” They go on to say that: “the CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought.” There are many problems with CPI as a measure of inflation. Investopedia covers many of the standard ones, such as which significant consumables are in or out of the basket as well as the missing and vast non-consumer economy.

Inflation

But the biggest problem with CPI is rarely mentioned, by even right-leaning media (although I have been noticing a welcome uptick from them in recent times). That is rising prices, however measured, are the effect -- not the cause -- of inflation. Prior to the government takeover of economics in the first half of the 20th century (with the help of the American Economic Association), inflation was commonly understood by economists and many non-economists to mean simply inflation of the money supply. So what has that looked like in recent months? Chart 3 below presents that in stark fashion. M1 is in billions of US dollars (USD $B).

Chart 3: M1 Money Supply (1Y)

The Federal Reserve, or The Fed, defines the money supply as: “the total amount of money—cash, coins, and balances in bank accounts—in circulation.” This is broken down into:

  • M0, which is “the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve);”
  • M1, which is “the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions);” and 
  • M2, which is “M1 plus savings deposits, small-denomination time deposits (those issued in amounts of less than $100,000), and retail money market mutual fund shares.”

April’s M1 barely increased from March’s, at around 1.5%. Although, from February to March, it exploded by nearly 173%. Again, “context matters.” If you thought Chart 3 above looked scary, then you “ain’t seen nothing yet” until you behold Chart 4 below (USD $B).

Chart 4: M1 Money Supply (Max)

Chart 4’s ‘hockey stick’ appearance, however, is driven not just by what we saw in Chart 3 but also by an M1 series break in May 2020 due to The Fed “recognizing savings deposits as a transaction account” which “amounted to approximately $11.2 trillion.” This is because they “reduced reserve requirement ratios on net transaction accounts to 0 percent” resulting “in savings deposits having the same liquidity characteristics as the transaction accounts.” This is not just a statistical “series break” but yet more monetary easing.

So What?

So what? In order to have a shot at solving a problem, one has to honestly define it and correctly identify whether it is cause or effect. Systemic inflation of prices, in part measured by CPI, is an effect. The main cause is systemic inflation of the money supply, in part measured by M1. This view is not only that of the Austrian school of economics, but also of more mainstream schools like Chicago and Keynesian, as can be seen by the following two quotes.

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

– Milton Fridman

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”

– John Maynard Keynes

The second quote above strongly suggests that it is not only government that drives inflation but that this can be done intentionally and not just unintentionally. An example of an unintentional inflationary period was 1974 to 1984, not long after the ending of the Gold Standard. An example of an intentional one is the era of Quantitative Easing (QE) of 2008 to 2014. The aim of QE was to stimulate the real economy of businesses and consumers, in the wake of the Global Financial Crisis (GFC). It amounted to a panicked revival of misguided policies based on Keynesian economics.
 

What next?

Despite assurances from the Biden White House that this new “inflation” situation is only temporary and due to non-monetary forces, the ‘signs and portents’ suggest something ongoing and monetary. Why? The Fed, US Treasury, and others in the Biden Administration have found something far worse than QE to ‘hang their hat on’, that thing being Modern Monetary Theory (MMT). Unlike QE, MMT aims to stimulate the political economy of corporations and activists, in the wake of a murky 2020-21 election season. Also unlike QE, MMT is not panicked, a revival, misguided or Keynesian. I provided a more detailed economic take-down of MMT elsewhere in August 2020.

Even worse still, MMT is to economics what Critical Race Theory (CRT) is to society and The Great Reset (TGR) is to the environment. Together, they are the Unholy Trinity underpinning this new decade of the 2020s, which so far seems to be a weird combo of the statist dystopia of 1984 along with the technocrat dystopia of Brave New World. Thus, what we all just saw in CPI in April and March is only the beginning or, in other words, what appears above the economic waves as we approach the inflation iceberg beneath. Given we have much more advanced warning with our iceberg than the Titanic apparently did, there may be still a chance of a "hard a-starboard" or right turn come 2022 and/or 2024. Maybe.

Darren Brady Nelson is an Austrian School economist and liberty evangelion as well as a C.S. Lewis and G.K. Chesterton style Christian. He is currently the Chief Economist at LibertyWorks of Brisbane Australia and a long-time policy advisor to The Heartland Institute of Chicago USA. He is also a regular commentator in traditional and online Australian and American media.