Blame Washington, Not Moscow, for Surging Inflation

Few politicians are willing to admit deficit spending is the larger cause.

News from the Bureau of Labor Statistics (BLS) that February's all-item Consumer Price Index (CPI) skyrocketed 7.9 percent on a year-over-year basis came as no surprise to American consumers. It was the largest increase since 1982 and followed increases exceeding 6 percent each month since September. Anyone who does the family shopping, as I do, or who keeps the family SUV or pickup truck full of gas has been seeing this coming for almost a year.

Expressing concern about soaring gasoline prices, President Joe Biden called it "Putin's price hike." While shifting the blame for inflation to a foreign despot may be attractive politically, the BLS report tells us that the price surge had nothing to do with Russia's invasion of Ukraine on February 24, too late to have much impact on the monthlong survey of daily gasoline prices.

The BLS report showed the food index was up 7.9 percent for the year and, yes, gasoline was up 37.9 percent. It may be worth remembering that the U.S. average price of a gallon of gas in January 2021 was $2.38; in January 2022, the price was about a dollar higher at $3.32. By March 10, the price was another dollar higher at $4.31. Yes, Putin's invasion is making a huge difference. But demand for gasoline surged much earlier when consumers, with money in the bank and uninterested in flying because of COVID-19 concerns, put family cars on the road in the midst of the great COVID shutdown, making the number of miles traveled in spring 2021 rise to new heights.

For too long now, our political leaders have been unwilling to accept the notion that their policies are the major source of inflation, that the inflation embedded in our economy is not transitory, that inflation is not just associated with sudden supply chain problems, and that inflation is not caused by business leaders suddenly becoming unusually greedy. Few have admitted inflation is created in Washington, here to stay, and likely to worsen over the next 12 months.

Many analysts (and even Biden's Council of Economic Advisers) now recognize that, fed by trillions of stimulus dollars distributed in 2020–21, surging consumer demand placed extraordinary pressures on the straining supply of home appliances, automobiles, residential structures, gasoline, paint, and even cat food. With money flooding and consumers shopping, prices had to sail higher.

Obviously, this is not to say that war-generated market turmoil does not matter. Anything that significantly reduces the supply of important commodities will generate higher prices. And while what makes gasoline or anything else more expensive matters very little to consumers who have little choice but to pay the price, those who worry about government policy and what might be done to redress the situation know there is a difference between changes in the relative price of one commodity (say, gasoline) and changes in the overall price level for all commodities taken together, as seen in the CPI.

Easing energy supply constraints and thus making gasoline cheaper will involve encouraging more drilling and more fracking, in addition to rethinking and revising regional formulation differences required by the Environmental Protection Agency that make gasoline more costly. We should remove anti-competition policies like the Jones Act, which bans foreign-built or foreign-owned vessels from U.S. coastal shipping, making it more costly to move petroleum products domestically.

But looking for ways to reduce overall inflation requires recognizing that inflation is first and foremost a monetary phenomenon. After all, the word itself refers to inflating the supply of money that then chases a limited supply of goods and services and thereby causes all prices to rise.

This gets us back to the trillions in printed stimulus money shipped happily to consumer checking accounts in 2020 and 2021. Early on, while the money printing presses were still running, noteworthy economists called for caution and predicted inflation would follow. Yes, much respected Florida State University* economist James D. Gwartney, Johns Hopkins University's much-admired monetary scholar Steve Hanke, and former treasury secretary and presidential adviser Lawrence Summers each sent warnings, predicting that government spending based on printed money would deliver a serious bout of inflation. Washington leadership was in no mood to hear the advice. Meanwhile, the printing press kept running, and more spending was being proposed.

Now, we find ourselves with the predictable result. But our political leadership, irrespective of party, almost without exception refuses to accept the monetary explanation. 

Unfortunately, refusal to focus on the source of inflation raises unhappy prospects for what we may hear for proposed remedies. Instead of limiting debt-based spending and revising regulatory constraints, politicians will more likely call for more command-and-control remedies. Look out for proposed wage-price guidelines, restrictions on corporate profits, and limitations on mergers, all for the purpose of keeping a lid on made-in-Washington inflation. This will continue to erode the prosperity of ordinary Americans.

*Correction: This piece previously described James D. Gwartney as a University of Florida economist. He works at Florida State University.