What’s Behind Runaway Inflation?
Mike Cosgrove
September 17, 2021
Inflation has taken off, an unwelcome whiff of the 1970s. But why is it happening now? Here’s why: The supply chain was designed for a U.S. economy growing at 2% per year, which was the 10-year prior average growth rate. In 2021 U.S. real economic growth is expected to be near 6%, according to Blue Chip Economic Indicators. It’s basic economics: When aggregate demand exceeds aggregate supply, the price level rises to clear the market.
Even kids running a lemonade stand understand that prices need to rise to clear the market when demand for their drinks exceeds supply. But that concept appears to be a conundrum for U.S. policy makers. Federal Reserve officials and administration economists seem to think it’s a supply-chain issue.
There is no reason to think that a supply chain should be built to meet a one-year economic growth of near 6% which will likely never be repeated. The Federal Reserve and Congress both created this excess aggregate demand situation.
Fed leaders have poured over $4 trillion into the U.S. economy since February 2020. Congress has been busy shoveling over $5 trillion dollars out the U.S. Treasury door to nearly all households and many businesses since the March 2020 shutdown.
The result is a hot U.S. economy, and the out-of-control Fed continues their QE purchases of $120 billion of securities each month into an already pricey equity market amid widespread inflation pressures.
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