Inflation is commonly thought of as a gradual increase in price levels. But sometimes prices rise due to supply and demand. For example, oil prices are increasing because India and China need more oil to fuel their rapidly growing economies. Technically, gas at $4 a gallon is not inflation. It’s a reaction to increased demand without an increase in supply. As another example, consider beef prices rising as feed costs increase due to diversion to ethanol production. The supply of feed is down, so the price increases. That’s not inflation. It hurts just as much, but it’s a different problem.
That said, look at the chart below from data supplied by the St. Louis Federal Reserve research economists showing the growth of the money supply from 2001 to today:
Us amateur economists have a technical term for this: Yikes!
As scary as that chart is, with the money supply almost five times what it was in June 1999, we still don’t seem to have terrible inflation. Yet. Some say it’s due to a low velocity of money. If it’s just sitting in a bank, not moving around in the economy, it doesn’t cause inflation. Perhaps.
Or maybe it’s going to have an effect very soon. This chart just came out today from the U.S. Bureau of Labor Statistics.
What could go wrong?