Executive Briefings

Opinion: Supply Chain Management Is Killing Inflation

The Wall Street Journal, among many other media outlets, recently reported with typical bemusement the low inflation that "defies a growing economy."

The article describes the situation as a "soft trend that is puzzling Federal Reserve officials who expected an improving economy to be pushing up consumer prices at a faster rate."

Economists don't seem to understand the micro-level truth behind these macro numbers, which is that supply chain management is killing inflation in the cradle.

Too Much Money or Too Few Goods?

Inflation comes from too much money chasing too few goods, or so say the fundamental principles taught in freshman economics courses. One huge part of this is, of course, monetary policy, and in particular the money supply. Hyperinflations as seen historically in 1920s Germany or 1980s Argentina can be created by simply printing too much currency. In the United States this sin has been largely avoided.

Kudos to the Fed for a job well done.

The other half of it, however, is all about supply. In the 1970s, inflation got pretty serious in the U.S. because of OPEC constraining oil supplies and, to a lesser degree, union power as expressed in strikes. The economy at the time wasn’t engineered to adjust as quickly as it is today, and passing along price increases to consumers was natural.

Supply constraints then drove up prices as consumers, in effect, blessed inflation by accepting the increases. For a while (remember Gerry Ford and “Whip Inflation Now” buttons?), consumer expectations fueled this dynamic, risking the kind of self-fulfilling hyperinflation cycle that doomed Weimar Germany.

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The article describes the situation as a "soft trend that is puzzling Federal Reserve officials who expected an improving economy to be pushing up consumer prices at a faster rate."

Economists don't seem to understand the micro-level truth behind these macro numbers, which is that supply chain management is killing inflation in the cradle.

Too Much Money or Too Few Goods?

Inflation comes from too much money chasing too few goods, or so say the fundamental principles taught in freshman economics courses. One huge part of this is, of course, monetary policy, and in particular the money supply. Hyperinflations as seen historically in 1920s Germany or 1980s Argentina can be created by simply printing too much currency. In the United States this sin has been largely avoided.

Kudos to the Fed for a job well done.

The other half of it, however, is all about supply. In the 1970s, inflation got pretty serious in the U.S. because of OPEC constraining oil supplies and, to a lesser degree, union power as expressed in strikes. The economy at the time wasn’t engineered to adjust as quickly as it is today, and passing along price increases to consumers was natural.

Supply constraints then drove up prices as consumers, in effect, blessed inflation by accepting the increases. For a while (remember Gerry Ford and “Whip Inflation Now” buttons?), consumer expectations fueled this dynamic, risking the kind of self-fulfilling hyperinflation cycle that doomed Weimar Germany.

Read Full Article