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Following the Commerce Department\u2019s release on the morning of April 10 showing that March consumer prices rose at 3.3% year over year in March, this writer received well over a dozen emails from Wall Street analysts, market strategists and economists making the same main point: It\u2019s the jump in oil prices triggered by Iran\u2019s closure of the Strait of Hormuz that\u2019s primarily responsible for the \u201chot\u201d CPI reading. They posit that as long as the cost of gas at the pump and the sundry petroleum and petrochemical derivative products\u2014from plastics to fertilizers\u2014remain elevated, the trajectory will remain far above the Fed\u2019s target tempo of 2%. These experts also invariably forecast a sharp downtrend in the inflation curve once the conflict ends.<\/p>\n
But a maverick economist asserts that these prestigious commentators are missing the problem\u2019s true cause, and that while prices are jumping at the same time oil\u2019s spiking, it only appears that the petroleum squeeze is to blame. He\u2019s Steve Hanke, the veteran \u201chardcore monetarist\u201d who is a professor of applied economics at Johns Hopkins University and has been nicknamed the \u201cMoney Doctor.\u201d \u201cEveryone\u2019s been writing about how oil prices are causing inflation. It only looks that way. The two are correlated, but the first doesn\u2019t cause the second at all,\u201d declares Hanke.\u201d He points out that although Wall Street regarded the new 3.3% figure as a surprise and as a result of the war, Hanke wasn\u2019t surprised. He notes that the three month annualized rate that occurred back in February was also exactly 3.3%. \u201cInflation was accelerating before the war, and it will keep accelerating after the war\u2019s over and oil prices fall,\u201d the big time contrarian told Fortune. \u201cIt\u2019s at the point now where the genie is clearly out of the bottle and won\u2019t be put back in any time soon.\u201d<\/p>\n
Hanke contends that it\u2019s growth in the money supply, not price shocks like the one we\u2019re now witnessing, that determine the overall course of the price level. \u201cIf gasoline and other oil products get more expensive, people have less to spend on rent, restaurants and everything else,\u201d he says. \u201cSupply chain disruptions only change relative prices, they have no impact on overall inflation.\u201d It\u2019s the explosion in the money supply he asserts, that\u2019s the real villain. That\u2019s just what the monetarist view predicts. \u201cIt\u2019s commercial banks that create 80% of new money,\u201d says Hanke. \u201cThe Fed only creates the other 20%. It\u2019s the big surge in that banking credit that\u2019s pushing up prices.\u201d He adds that a rise in the money supply translates into higher prices only following a significant lag. The monetary takeoff happened over two years ago, and he\u2019s been warning of its aftermath ever since.<\/p>\n
He points out that the Fed was en route to slaying inflation in 2023, when commercial credit created by banks was negative. But that metric reversed course the following year, entering positive territory in March of 2024, then racing to hit a pace of 6.6% in February. \u201cThat\u2019s an enormous increase, and the current rate\u2019s higher than the golden mean for achieving 2% inflation,\u201d says Hanke. Once again, it\u2019s bank lending that accounts for the lion\u2019s share of the leap in the money supply. \u201cThe banks opened up lending in response to the Administration\u2019s signal that it would loosen regulations and reserve requirements, among other things,\u201d he adds.<\/p>\n
Japan in the 1970s is a great example of how loose money policy, not the oil crisis, sparked inflation <\/p>\n
Hanke argues the giant price surge in this country during the 1970s also arose from monetary excess, not the worst oil crunch in modern history. For example, he points out that prior to the 2nd chapter of the crisis in 1979 and 1980, the money supply was waxing at a torrid 11.2% in period before the crisis, twice the level consistent with a 2% CPI, spawning 13.2% inflation. Had growth been moderate, he argues, the moonshot in prices wouldn\u2019t have happened.<\/p>\n
As proof, Hanke cites Japan\u2019s experience during the same period half a century ago. In 1974, the first oil cataclysm ignited by the Yom Kippur war got almost universally tagged for driving inflation from 4.9% to 23.2%. But Hanke contends that the seeds were actually planted in mid-1971, when the Bank of Japan gunned the money supply at 25.2%. Here\u2019s the evidence he\u2019s right. In July of 1974, the BoJ reversed course, chopping the pace of money expansion in half. By 1978, inflation had dropped to 4.2%. That year, the revolution in Iran sent oil prices skywards again. But the BoJ\u2019s moderation\u2014contrary to the scenario in the U.S.\u2014kept prices in check; inflation defied the shock by actually declining to 3.7%. \u201cThe oil crisis occurred and inflation went below where it was before the shock because of all the tightening,\u201d says Hanke.<\/p>\n
Hanke calls the Japan example \u201ca natural experiment, and they\u2019re hard to find in economics.\u201d He laments that the U.S. didn\u2019t heed that lesson, nor the fall out from our own excesses in the last oil squeeze. It\u2019s allowing money supply to run hot that will saddle Americans with inflation no matter what happens in the Gulf. The oil crisis will end with the war, it\u2019s the inflation predicament that has legs.<\/p>\n
#real #inflation #isnt #oil #prices #Johns #Hopkins #economist<\/p>\n","protected":false},"excerpt":{"rendered":"
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