Rising Supply of Money Drives Inflation to New Highs

Rising Supply of Money Drives Inflation to New Highs


According to data released by the U.S. Department of Labor last week, the rising supply of money drives inflation to new highs in the U.S… after months of asserting that inflation was temporary. Federal Reserve officials in late 2021 acknowledged that prices would likely NOT return to previous levels. “It was time to raise interest rates.”

The Department said the most significant three items in household budgets  – shelter, gasoline, and food – all saw cost increases, helping to fuel the highest inflation rates in the country in February since 1982;  that’s 40 years!

In February, the Consumer Price Index (CPI), which measures the fluctuation of the price of essential goods and services, jumped 7.9% from a year ago. Inflation is defined as the general rise in the price of goods and services. The Fed attempts to stabilize the inflation rate at roughly 2% annually by balancing employment levels and the federal funds rate, a target rate where banks lend excess reserves to each other overnight. More importantly, the rate serves as a benchmark for interest rates in general.

Rising Supply of Money Drives Inflation to New Highs

Rising inflation can signal an expanding economy, as employment grows and demand for goods and services outstrips supply. But inflation can also result from the supply of money increasing faster than economic output. While complex, the theory generally posits that a greater amount of money chasing a limited amount of goods and services drives up prices. As the Fed’s balance sheet more than doubled to $8.5 trillion from February 2020 to November 2021 in reaction to the pandemic, the consumer price index rose nearly 8%

Bankrate Chief Financial Analyst Greg McBride said that there is “nowhere to hide. This is hitting everybody,” he added, “[with inflation] most pronounced on items that are necessities.”Those necessities include household grocery bills, which are 8.6% more expensive now than they were a year ago; gasoline prices are up 8.6% from the year before; and shelter costs such as rents, which now cost 4.7% more than they did this time last year.

Although the cost of shelter is up less than the others, it’s likely to have the most significant impact because it makes up for a more substantial proportion of most households’ costs. McBride noted that housing costs account for more than a third of most people’s budgets. According to Freddie Mac, homeowners haven’t escaped either, with mortgage rates rising this week to an average of 3.85%. “That comparatively benign increase is likely to put the biggest squeeze on household budgets for the remainder of the year.”

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