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Wall Street Journal

‘Inflation' Review: The Price of Cheap Money

Inflation is both a remarkably complex and extremely simple phenomenon. The complexity lies in the variety of circumstances that typically accompany its appearance. These may include an energy or some other kind of supply shock, acute social conflict, excessive government indebtedness, fiscal profligacy or a collapse in the value of the currency on the foreign exchanges. Yet none of these factors necessarily result in the loss of monetary stability. Then there's the straightforward explanation for inflation, succinctly expressed by Milton Friedman: 'too much money chasing too few goods.' An extraordinary increase in the money supply is both a necessary and sufficient condition for inflation. The monetarist theory of inflation dates back at least 500 years and can be found in the 16th-century writings of Copernicus and the French jurist Jean Bodin. There has never been an inflationary period that wasn't accompanied by an above-average monetary expansion. The most remarkable aspect of Mark Blyth and Nicolò Fraccaroli's 'Inflation: A Guide for Users and Losers' is that the simple, theoretically robust and historically validated monetarist theory is nearly ignored, while the contingent circumstances that often but don't always accompany inflation are vested with causal power. Thus, the recent bout of inflation is explained in terms of the supply shock induced by the Covid-19 pandemic and Russia's 2022 invasion of Ukraine, which led to a brief escalation of energy prices. Never mind that Friedman himself pointed out that the two oil shocks of the 1970s could not have resulted in a widespread inflation without central banks accommodating them with loose monetary policies. Had the money supply remained fixed, the Chicago economist reasoned, there would have been a shift in relative prices—higher for energy and lower for most other goods—but no rise in the general price level.