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Apparently, most economists have forgotten what causes inflation.ÌýThis unnerves me.

Perhaps it shouldn’t.ÌýSome forgetting is natural.ÌýFor good reason, we instinctively focus our attention on pressing problems at hand.ÌýOnce a problem at hand is resolved, we move on.ÌýThe once pressing problem fades away and becomes history.ÌýAnd once it’s history, it’s history – as in ignored. Few people care about history.ÌýFor most, the present is where it’s at.

This might be why most economists seem to have forgotten what causes inflation.ÌýUntil the post-pandemic inflation, the last significant inflation in the U.S. was 1973-1982. (Inflation averaged 9% a year during those years.)ÌýThe 1983-1991 stretch of choppy but moderate inflation was followed by the remarkable 1992-2020 stretch in which inflation averaged 2.2% a year and was steady to boot.

Twenty-nine consecutive years in which inflation is not an issue, never mind a problem.ÌýOut of sight, out of mind.ÌýA person might forget.

Except, how does an economist forget that the fundamental cause of any significant inflation is always, and can only be, rapid growth of the supply of money?

The lesson that significant inflation – significant being consistently greater than 5% annually – can only be caused by rapid growth in the quantity of money in circulation is one of the oldest and most important lessons in economics.ÌýHistorians of economics credit the French political philosopher, Jean Bodin, for describing it first – in 1568.

Unrelenting inflation was a pressing problem in 16^th century Western Europe. In a tract published in 1568, Bodin argued that the source of the European inflation was the persistent influx of gold and silver that Spain was mining in Peru, shipping home, minting into currency and exchanging for goods in trade with France, England and the rest of Europe.

In short: the primary cause of significant inflation is rapid growth of the supply of money.

Since Bodin’s tract, economists have devoted much thought and ink to the relationship between prices and the money supply.ÌýIt’s a fluid and at times blurry relationship.ÌýBut what Bodin described in 1568 has been observed in every significant inflation since and before, wherever it occurred: rapid growth of the money supply preceding significant inflation.

The negative also holds: significant inflation does not occur without rapid money supply growth.

Now, consider this.ÌýU.S. inflation was 2.4% in 2018, 1.8% in 2019 and 1.2% in 2020.Ìý 2021 began with inflation at 1.4%. In March, it bounced to 2.6%; in April, to 4.1%.ÌýIn December, it hit 7.2%; in June 2022, 8.9%.

Any economist with a well-maintained cerebral toolbox of important lessons learned knows where to look first to figure out what caused the post-pandemic inflation: the money supply.

What unnerves me is that I have yet to find an analysis of what caused the post-pandemic inflation that even mentions money supply growth.ÌýThe Federal Reserve’s Monetary Policy Reports don’t even mention money supply growth.

Let’s buck the trend.

M2 is the Federal Reserve’s broad measure of the U.S. money supply.ÌýM2 includes currency held by the public, checking deposits, savings deposits, CDs, money market deposits and retail money market funds.Ìý

From 2000 thru 2019, M2 increased at an average annual rate of 6.2%. In 2020, M2 increased by 25.7%. In 2021, M2 increased by 11.4%.ÌýFrom February 2020 to February 2022, M2 increased by 40.4%.

Yet again: rapid growth of the money supply preceding significant inflation.

The Federal Reserve began its tight monetary policy in July 2022.ÌýSince July 2022, M2 has decreased by 4.4%.ÌýThat helps explain why inflation has fallen to 3.7%.

We’ll take this up again next column.