![]() So, for example, if real GDP is growing at 3 percent per year and V is growing at 1 percent per year, then a 4 percent annual growth in the money supply will lead to an inflation rate of 2 percent. A simple algebraic proof shows that the percentage change in M plus the percentage change in V must approximately equal the percentage change in P plus the percentage change in y. ![]() More typically, of course, V and y are changing but in somewhat predictable ways. If V and y are constant, then any increase in M must cause an increase in P. Incidentally, Milton Friedman had a version of that equation on his California license plate. ![]() In that equation, M is the supply of money, V is the velocity of money (which is inversely related to the demand for money), P is the price level, typically measured by the CPI, and y is real gross domestic product. The reason has to do with what is called variously the quantity equation or the equation of exchange: MV = Py. ![]() But within a decade, the evidence from the United States and other countries had convinced most economists that Friedman was right. His statement was an empirical one, not a logically necessary one, and most professional economists, still in the thrall of John Maynard Keynes, did not agree with Friedman. After having defined inflation, in that same talk, as a “steady and sustained rise in prices,” Friedman argued that one could not find inflation anywhere in the world that was not caused by a prior increase in the supply of money or in the growth rate of the supply of money. Inflation, by definition, means that money loses its purchasing power and, therefore, is a monetary phenomenon. In a trivial sense, of course, the statement is true. “Inflation is always and everywhere a monetary phenomenon.” Monetary economist Milton Friedman made this line famous after stating it in a talk he gave in India in 1963. Inflation is Always and Everywhere a Monetary Phenomenon Is the fear of Carter-era inflation justified? Is the increase in gasoline prices a sign of higher inflation? Is the fear of hyperinflation justified? With President Biden implementing and proposing various policies that will hurt economic growth, is there much danger in the short run of a return to stagflation? My answers: somewhat, no, no, and no. Running the numbers from June 1977 to June 1981 gives a similar average annual inflation rate: 10.5 percent. Still, the 10.4 percent estimate gives a reasonable take on Carter-era inflation. There are lags, of course: Carter can hardly be blamed for the first few months of inflation in 1977, just as Reagan can hardly be blamed for the first few months of inflation in 1981. Recall that during the Carter administration, in the forty-eight months between his inauguration on January 20, 1977, and Ronald Reagan’s inauguration on January 20, 1981, inflation measured by the CPI averaged 10.4 percent annually. Many have used the feared C-word: Carter. With the recent report that the Consumer Price Index (CPI) rose by 4.2 percent in the twelve-month period from April 2020 to April 2021, many people have started to worry that worse is to come.
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