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What caused the inflation?

Summary:
Consider the following two claims: 1. Given that NGDP quickly returned to the pre-Covid trend line, the recent bout of high inflation was caused by supply problems. 2. Given the recent supply problems, the recent bout of inflation was caused by the decision to bring NGDP quickly back to the previous trend line. If you see the world the way I do, it’s almost physically painful to read the media as they debate the cause of higher inflation.  It makes my hair hurt. What caused the recent bout of inflation?  What do you mean by “cause”? Here’s what I said in my recent book, entitled The Money Illusion: Similarly, a government policy could be said to have caused the Great Recession if—in a very plausible alternative policy setting—the exact same policy tool that was

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Consider the following two claims:

1. Given that NGDP quickly returned to the pre-Covid trend line, the recent bout of high inflation was caused by supply problems.

2. Given the recent supply problems, the recent bout of inflation was caused by the decision to bring NGDP quickly back to the previous trend line.

If you see the world the way I do, it’s almost physically painful to read the media as they debate the cause of higher inflation.  It makes my hair hurt.

What caused the recent bout of inflation?  What do you mean by “cause”?

Here’s what I said in my recent book, entitled The Money Illusion:

Similarly, a government policy could be said to have caused the Great Recession if—in a very plausible alternative policy setting—the exact same policy tool that was already being used would have avoided the recession. As an analogy, a bus driver might be said to have caused the bus to hit a tree if a different position of the steering wheel would have avoided the accident. We don’t think of bus drivers as “solving accident problems,” though we hope they will not cause accidents.

Because I prefer to think of causation in terms of policy counterfactuals, I use the optimal policy as a benchmark.  I believe that it was appropriate to quickly bring NGDP back to the previous trend line, and as a result I might say that supply problems caused the recent bout of higher inflation.  I also expect NGDP to overshoot the trend line over the next 12 months.  If this does happen, then I will view an excessively expansionary monetary policy as causing the excessive inflation that is likely to occur over the next 12 months.

On the other hand, if someone says that the previous 12 months of inflation was caused by an expansionary monetary policy, I certainly would not claim they were wrong; I’d simply assume they favored a less expansionary monetary policy.  Or perhaps they define “causation” differently from the way I do.

The world is full of terms that have never been clearly defined.  Truth, reality, science, monetary policy, inflation, and causation are six examples of fuzzy concepts.  Show me an unambiguous definition of any of them.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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