Good news – the annual inflation rate fell from 7.1 percent in November to 6.5 percent in December, according to the latest consumer price index. That shows that the Fed should stay on course, says CEI Senior Economist Ryan Young:
“There is no way around it: The money supply is the most important factor in inflation. Today’s fantastic CPI reading is yet another point in favor of the old quantity theory of money. Inflation went up after the Federal Reserve grew the money supply by 40 percent in response to the COVID downturn. And now it is going back down after the Fed ended its $5 trillion bond-buying program and began raising interest rates.
“This pattern fits to a tee every previous inflationary episode in history. The inflation rate nearly always tracks money supply growth, with a lag of a year or so.
“The Federal Reserve should keep tightening since inflation remains above its 2 percent target, and the federal funds rate is still below the inflation rate. Congress and President Biden should resist the urge to go on still more spending binges.
“As long as they do this, the inflation rate should continue to slowly fall over the coming months, barring any hiccups with supply chains or energy shocks.”