Inflation has become a constant concern for policymakers, businesses, and households alike. While the inflation rate has cooled significantly since its peak, prices remain more than 20% higher than they were just four years ago. Even though the inflation outlook has improved, it remains a hot topic of discussion as the future of monetary policy becomes increasingly uncertain.
Inflation reached a record high of 9.1% in June 2022, driven by a combination of factors, including supply chain disruptions during the COVID-19 pandemic and an unprecedented increase in the money supply by the Federal Reserve (Fed). As the economy struggled to rebound from lockdowns, the Fed responded by pumping trillions of dollars into the economy through aggressive monetary expansion to avoid a depression. However, this led to unintended consequences, with inflation skyrocketing at levels not seen since the 1980s.
Fast forward to 2024, and inflation has significantly subsided, hovering around 3% since June of last year. This cooling effect was largely due to the Fed’s decision to reverse its money growth policies, causing the money supply to contract and slowing down inflation. However, despite this progress, prices remain significantly elevated compared to four years ago. For many households, the price tags on groceries, housing, and gas are still painful reminders of the inflation spike they endured.
The Federal Reserve, under chair Jerome Powell, has now announced a 50-basis-point cut in the federal funds rate, sparking debates about the future trajectory of inflation. While the rate cut signals a more dovish approach, it also raises concerns about reintroducing inflationary pressures as the money supply starts to grow again. Many analysts believe that while the current rate cut will have modest effects, continued reductions in interest rates will lead to further monetary expansion, potentially reigniting inflationary pressures.
The political landscape also adds to the uncertainty, with inflation being a pivotal issue in the upcoming presidential elections. The debate over what causes inflation and how to tackle it has become increasingly polarized, with both parties offering conflicting views on the causes and solutions to the current price crisis.
The Fed’s Money Supply Strategy
A core aspect of inflation is the relationship between the money supply and the economy’s capacity to produce goods and services. The classic monetary theory of inflation, championed by economists like Milton Friedman, suggests that inflation is always and everywhere a monetary phenomenon. When the money supply grows faster than the economy’s productive capacity, it leads to more money chasing the same amount of goods, pushing prices upward.
During the COVID-19 pandemic, the Fed’s decision to rapidly increase the money supply was initially seen as a necessary step to stabilize the economy. The central bank implemented various measures, including bond-buying programs (quantitative easing) and slashing interest rates to near zero, which flooded the market with liquidity. At the time, inflation was low, and the economy was in deep recession, so these actions were viewed as essential to avoid further economic collapse.
However, as the economy began to recover, supply chain issues, labor shortages, and surging demand collided with the excess liquidity in the system, causing inflation to spike. By mid-2021, it became clear that the inflationary effects of the Fed’s money expansion policies were taking hold. In response, the central bank reversed course, hiking interest rates to cool down the overheated economy and slow money growth.
Now, as inflation has started to retreat, the Fed’s recent interest rate cut raises questions about whether monetary policy will once again become too loose. While a modest increase in the money supply to reduce the federal funds rate may not cause an immediate spike in inflation, the Fed’s plan for additional rate cuts suggests a long-term increase in money supply growth. Many analysts argue that if this trajectory continues, the risk of inflation returning in the future will increase, leaving the economy in a delicate balance.
Kamala Harris Greed Theory of Inflation
Inflation has become not only an economic issue but also a political one, with politicians from both sides of the aisle offering various theories about its causes. Vice President Kamala Harris recently presented a controversial take, which some have called the “Greed Theory of Inflation.” According to Harris, rising inflation is largely driven by greedy corporations taking advantage of their pricing power to squeeze consumers.
In a speech earlier this year, Harris argued that large corporations, particularly in industries such as oil, gas, and pharmaceuticals, have raised prices beyond what is necessary, fueling inflation and hurting ordinary Americans. The theory suggests that instead of market forces or economic fundamentals driving inflation, corporate greed is the primary culprit. By exploiting supply chain disruptions and inflationary fears, corporations, according to this view, have used the opportunity to increase profit margins at the expense of consumers.
However, the “Greed Theory” has been met with skepticism by economists across the political spectrum. As economist and policy analyst John Goodman pointed out in his recent essay, The Greed Theory of Inflation, Harris’s perspective is isolated from mainstream economic thought. Even liberal economists who traditionally support Democratic policies have largely distanced themselves from this explanation. Many argue that it fails to account for the basic laws of supply and demand and the role of monetary policy in driving inflation.
Critics of the Greed Theory contend that while corporate profits did increase during periods of inflation, this is more of a consequence than a cause of inflation. As companies faced higher input costs due to supply chain disruptions and rising wages, they raised prices to maintain profitability. Moreover, proponents of market-based economic theories argue that corporations are always profit-driven; hence, labeling their behavior as greedy during inflationary periods does little to explain the broader macroeconomic factors at play.
By this logic, if corporate greed were the primary cause of inflation, it would be difficult to explain why inflation rates rose so dramatically from 2020 to 2022 and then fell steadily thereafter. According to Harris’s theory, corporations suddenly became greedier during the pandemic, but then became less greedy in recent months as inflation subsided. This interpretation lacks coherence from an economic standpoint and raises doubts about the validity of the Greed Theory.
Inflation in 2024 and the Political Stakes
As inflation continues to be a major issue in 2024, the political stakes are higher than ever. Both presidential candidates are focusing heavily on the issue of inflation, offering starkly different views on what caused it and how to fix it.
On the Democratic side, Vice President Harris and her party continue to highlight corporate greed as a major factor driving inflation. However, as noted earlier, this explanation has received limited traction among economists and is seen more as a political narrative than an economic reality. Nevertheless, it resonates with many voters frustrated by the high cost of living, particularly those who feel that large corporations have too much power over prices.
On the Republican side, Donald Trump and his running mate J.D. Vance have focused their criticism on monetary policy and trade. The Trump-Vance ticket argues that the Fed’s reckless money printing during the pandemic was the primary driver of inflation, and that policies under the Biden-Harris administration worsened the problem. They also advocate for tougher trade policies and higher tariffs, framing foreign competition as a key factor in the economic challenges facing American workers and industries.
While economists generally agree that monetary policy played a significant role in the inflation surge, the Trump-Vance approach to trade has also raised concerns. Many economists argue that protectionist trade policies, such as tariffs and import restrictions, tend to raise prices for consumers and can lead to retaliatory measures from other countries. They warn that implementing higher tariffs could exacerbate inflation rather than alleviate it.
The debate over inflation highlights a broader challenge for economists and policymakers: how to balance sound economic theory with political realities. Inflation is a complex issue with multiple causes, ranging from monetary policy to supply chain disruptions to global trade dynamics. However, in the current political climate, the nuances of these causes are often overshadowed by simplified narratives designed to appeal to voters.
Economists in the Public Debate
At the heart of this debate is the role of economists in shaping public policy and discourse. Historically, economists have enjoyed a high level of trust and respect from both the public and elected officials. As depicted in popular culture, such as the TV show The West Wing, economists were often viewed as neutral arbiters of truth, providing intellectual rigor and honesty to policy discussions.
However, in recent years, that trust has eroded. Too many economists have allowed their personal political views to influence their analysis, leading to skepticism about their impartiality. For example, while most economists agree that monetary policy is a significant driver of inflation, the political environment has made it difficult for some to voice their views without being seen as aligning with one party or the other.
A competent professional economist cannot, in good faith, support the Greed Theory of Inflation. As mentioned earlier, greed, in the context of economics, is a universal characteristic—it is simply a desire for more. If greed were the main driver of inflation, then inflation would be a constant, since human desires are constant. Yet inflation fluctuates in response to various economic policies and external factors, not human greed alone.
Economists have a responsibility to call out misinformation and political narratives that distort the reality of economic theory. This includes rejecting simplistic explanations like the Greed Theory and focusing on more substantive discussions about monetary policy, fiscal responsibility, and international trade.
As inflation remains a central issue in 2024, the public debate surrounding its causes and solutions is more charged than ever. While inflation has cooled from its 2022 peak, prices remain elevated, and the future of monetary policy will play a key role in determining whether inflation resurfaces.
Politicians, from Vice President Kamala Harris to the Trump-Vance ticket, are framing inflation in ways that resonate with voters but often deviate from economic reality. Economists must step in to provide clarity, ensuring that political narratives do not obscure the true causes of inflation.
