Why Has There Been So Little Price Inflation?
A question I have heard a lot from those with a Kuyperian bent is “since the Federal Reserve has so greatly increased the money supply, why hasn’t there been corresponding inflation because of it?” Here is one attempt to answer this question, and my hope is, begin a discussion on this topic. I’ll try to answer the following question:
From the Crash of 2008-2009 to now, the money supply (referred to as M2) increased from about $7.5T to about $11T, or by approximately 50%. So why doesn’t everything that cost $1.00 in 2009 cost $1.50 today?
1. An inaccurate gauge of price inflation
Government economists try to track the general rise in prices, or price inflation as Austrian economists call it, (most other economists, without linking inflation to monetary policy, simply term as “inflation”) by using the Consumer Price Index (CPI). The CPI has shown price inflation in this period as being between 2-4%, and most often around 2%, which they consider normal. The first answer to the question above is that the CPI is very inaccurate. The simple answer is that there has been much more inflation than we are being led to believe. But even if inflation is between 10-15%, which is a number many CPI skeptics might hold to, that still doesn’t make stuff that costs $1.00 in 2009 cost $1.50 today. So what else is going on?
Austrian Business Cycle Theory doesn’t stipulate that every Dollar created out of thin air must immediately be reflected in the prices of consumer goods. That being said, even if the newly created money did immediately have an effect on consumer goods, that is not the only force acting upon prices. The supply of goods and the demand for them can mask the effect of monetary inflation. If productivity increases, and the supply of consumer goods subsequently increases, the price-deflation that would seem to be a constant in free-market, hard money conditions hides price inflation. So our widget that costs $1.00 in 2009, should cost, under normal hard money conditions, maybe $0.75 or $0.80.
3. The money simply has sat in ‘excess reserves’
One theory thrown out is that banks (both in the United States and abroad) have sat on the new money and have only recently begun to lend.
4. New money goes to capital goods and industries first.
One of Ludwig von Mises developments to Austrian Business Cycle Theory is that newly created inflationary money is lent out to pay for capital goods in certain industries, causing the prices of capital goods in those particular industries to artificially rise and send the signal to investors to invest in those industries where they normally would not have otherwise. An inflationary bubble begins to form in those industries that ultimately will result in a bust. While the new money will eventually find its way throughout the economy as a whole, it affects those goods first and worse than all others.
Here are a few helpful resources for further study: