Below is the video we did three years ago on the Federal Reserve (the Fed), interest rates and Gross Domestic Product. Although economic circumstances were much different back then than they are today, the basic economic discussion is still legitimate and relevant. The video is also highly relevant to any discussion of the causes of inflation, because the Fed’s Interest Rate policy and the Fed’s affect on the Money Supply clearly have a major, and often overwhelming effect on inflation.
A few things immediately come to mind that have changed that have greatly affected the level of inflation since we did this video three years ago. The biggest is very probably the Ukraine conflict. This has had an immense impact on the price of oil. Since Ukraine produces so much Wheat the price of food is also affected by that conflict. The second factor is the residual and continuing affects of Covid. Supply chains have never totally recovered from the early days of the outbreak of Covid. Car manufacturers are having a hard time getting computer chips for their cars, and when they do so, they often have to pay more for them. These two factors are supply side causes of inflation. This is because anything that adversely affects the supply or prices of raw materials inherently causes prices of all finished or manufactured goods to rise.
The third factor is the continuing increase in the level of the money supply. Fourth is the level of federal budget deficits. These two factors affect the demand side of the economic equation and are dealt with at some length in the video. Traditionally they have been major, if not the biggest, culprits in causing inflation. The Fed often fights inflation by using its powers to change (that is, increase) interest rates. Again there is more about this in the video. However, the Federal Reserve’s interest rate policy is a big issue right now (June/July of 2022).
And a fifth factors, according to Professor Robert Reich (former Secretary of Labor), are the windfall profits being reaped by the likes of oligopolistic oil and other companies. In short, these large companies are taking advantage of the disruptions caused by Covid and Ukraine as kind of a smokescreen to charge excessive prices and, in the process, are making huge profits all at the expense of the general public who pays excessively high prices for their products and services.
The full affects of tensions with China over Taiwan remain to be seen, but that situation may also have an inflationary impact. Of this group of factors, the money supply and federal budget deficits are the ones that have traditionally been thought of as causing or contribution to inflation by creating excessive demand for goods and services. The Federal Reserve, at one time focused on the money supply, because it had and still the most control over it. More recently the Fed has focused on the level of interest rates when tackling inflation. Naturally, Congress and the President are the two actors having the most influence on the size of the federal budget deficits.
In watching the video please note that It wasn’t that long ago that 5 % unemployment was considered full employment. What percentage actually constitutes full employment has always been thought of as being very important in terms of determining when it is wise for either the Fed or the government to try to stimulate the economy. Doing so at full employment is believed to be inherently inflationary. Why this is so, is discussed in the video. However, in this regard, for several years now unemployment has been below 4 % with very little inflation. One other factor affecting the level of inflation that does not receive much attention in the press is “velocity’ which is the rate that money travels though the economy. This factor is briefly addressed in the video as well.
In viewing the video below try to determine who, if any one person or governmental entity is responsible for causing or controlling inflation. There are a whole host of actors and factors that cause and/or have responsibility for attempting to control inflation. You will probably find that it is almost impossible to point the finger at any governmental entity or public official.
June 18, 2022
David Dixon Lentz
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