What About Prices?
Chapter 8 from my forthcoming book Rebuilding Economics from the Top Down
Inflation, having been quiescent for decades, became a serious issue once more with the bout of inflation that occurred after the peak of the government reaction to the Covid crisis. Though it did not reach the 12-15% levels of the mid-1970s to mid-1980s, and it has fallen sharply from its peak of 8.9% p.a. in June of 2022 to 3.2% in October 2023, it was still a serious break from the low inflation period from the mid-1980s until the beginning of the 2020s—see the top chart in Figure 19.
This is Chapter 8 from my forthcoming book Rebuilding Economics from the Top Down, which will be published by the Budapest Centre for Long-Term Sustainability and the Pallas Athéné Domus Meriti Foundation. I am serialising the book chapters here. A watermarked PDF of the manuscript is available to supporters.
The original Neoclassical (and Austrian) explanation for inflation is that it is caused by “too much money chasing too few goods”, with government money creation being the culprit, and with “long and variable lags” between government deficits and actual inflation:
The lag between the creation of a government deficit and its effects on the behavior of consumers and producers could conceivably be so long and variable that the stimulating effects of the deficit were often operative only after other factors had already brought about a recovery rather than when the initial decline was in progress. Despite intuitive feelings to the contrary, I do not believe we know enough to rule out completely this possibility. If it were realized, the proposed framework could intensify rather than mitigate cyclical fluctuations; that is, long and variable lags could convert the fluctuations in the government contribution to the income stream into the equivalent of an additional random disturbance. (Friedman 1948, p. 254. Emphasis added).
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