Causes Of Inflation: Forecasting The Federal Reserve And Supply Shortages

Causes Of Inflation: Forecasting The Federal Reserve And Supply Shortages

People shop at a grocery store. (Photo by Spencer Platt/Getty Images) The outlook for inflation in 2022 derives from Federal Reserve policy, supply and labor shortages, and time lags of policy actions. This framework leads me to a pessimistic forecast, though differences in judgment about the details could lead to a milder outlook. "Economists use the term 'inflation' to denote an ongoing rise in the general level of prices quoted in units of money," according to Lawrence H. White. The "general level of prices" is the key concept. If the price of toilet paper goes up, we don't call that inflation. But if toilet paper and cell phones and apartment rent and healthcare prices all rise, then the average gain in prices is described as inflation. This is important when thinking about oil and gasoline, as we'll see later. "… 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," according to Milton Friedman. The part about inflation being a monetary phenomenon has been quoted often, but the part about money growth relative to output is equally important.