This chart (click to enlarge) shows the graphs of the growth in government expenditures and inflation at the consumer level.
If inflation is a monetary phenomenon (as clearly stated by Milton Friedman) and government spending is closely related to the growth of the money supply (see blog below), then it should come as no surprise that inflation is closely related to government spending.
This is exactly what this chart shows. Government spending declined sharply since 1980 and inflation also subsided. Government spending has been rising sharply since 1995 and inflation is now heading up in a worrisome way.
Can the Fed do anything about inflation? The answer is a clear “NO”. Why?
1. The first step would be to lower the growth of the money supply by raising interest rates. But they have no control over interest rates. The markets do. It would be unthinkable that they engage in a tightening phase with the economy on the brink of a serious recession. The markets are forcing the Fed to stay put.
2. Even if they could raise interest rates, they would have to allow the money supply to grow to meet government spending as they did in the 1970s. And the current growth of the money supply and low real interest rates are not conducive to lower inflation.
3. Market forces will control inflation. The higher inflation, the more serious the economic recession. Slower growth will keep commodities from rising and eventually it will translate into more stable inflation. But you can rest assured that if government spending follows the current trend, inflation will rise to higher levels in the next business cycle, as it happened in the 1970s.
More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
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