The dog that didn't bark
Most experts seem to believe that our inflation problem is largely caused by supply bottlenecks in everything from food to oil to computer chips. But what if that isn’t true? What if some other factor is the actual cause of high inflation? And how would we know this to be the case?
One way of addressing this issue is to look at inflation rates across countries. The following graph shows 12-month inflation in the US and Japan:
Inflation over the past 12 months is running at over 8.5% in the US, vs. about 0.5% in Japan. Admittedly the Japanese data is two months behind, but even their March CPI data is likely to show 12-month inflation at only about 1%. Why is inflation in the US roughly 7.5 percentage points higher than in Japan? Doesn’t Japan also have to pay much higher prices for imported oil?
One possible explanation is differences in monetary policy, which is best measured by looking at growth in NGDP. Over the past 4 quarters, NGDP growth is running at about 11.8% in the US versus negative 1% in Japan. Thus looking at monetary policy alone, and completely ignoring supply bottlenecks, one would expect inflation in the US to be about 12.8% higher than in Japan:
Why is US inflation only about 7.5% higher than in Japan, and not 12.8% higher? In an accounting sense the difference is due to greater real GDP growth in the US. That’s not surprising as (in the short run) monetary stimulus doesn’t just boost inflation, it also boosts real GDP. Because the economy in the US has recently overheated, some of that excessive RGDP growth will eventually turn into inflation. Fortunately, a significant portion of the rapid RGDP growth represents recovery from a depressed economy in 2020.
To summarize, the high inflation in the US is mostly due to expansionary monetary policy. Almost any time NGDP grows at 11.8%, you can expect relatively high inflation. That’s not to say that supply bottlenecks have had no impact; even in Japan you can see an uptick in inflation over the past year. But as a first approximation, inflation problems are excessive NGDP growth problems. Stabilize NGDP growth at 4% and the minor blips in inflation we continue to observe will truly be “transitory”.
PS, Strictly speaking, NGDP growth is the sum of RGDP growth and GDP inflation, not CPI inflation. But inflation in the US is much higher than in Japan, however measured.