Editing Inflation (section)

=== View post-2000 to present ===
{{See also|Economic analysis of climate change|Housing shortage}}

A common view beginning around the year 2000 and holding through to the present time on inflation and its causes can be illustrated by a modern Phillips curve including a role for supply shocks and inflation expectations beside the original role of aggregate demand (determining employment and unemployment fluctuations) in influencing the inflation rate.<ref name=Blanchard/> Consequently, demand shocks, supply shocks and inflation expectations are all potentially important determinants of inflation,<ref name=congress/> confirming the basis of the older [[triangle model]] by [[Robert J. Gordon]]:<ref>Robert J. Gordon (1988), ''Macroeconomics: Theory and Policy'', 2nd ed., Chap. 22.4, 'Modern theories of inflation'. McGraw-Hill.</ref>

* ''Demand shocks'' may both decrease and increase inflation. So-called [[demand-pull inflation]] may be caused by increases in aggregate demand due to increased private and government spending,<ref>{{cite web |last1=Gillespie |first1=Nick |last2=Taylor |first2=Regan |title=Biden Is Clueless About Inflation |url=https://reason.com/video/2022/04/01/biden-is-clueless-about-inflation/ |website=reason.com |date=April 2022 |publisher=Reason |access-date=4 April 2022 |archive-date=April 27, 2022 |archive-url=https://web.archive.org/web/20220427225435/https://reason.com/video/2022/04/01/biden-is-clueless-about-inflation/ |url-status=live }}</ref><ref>{{cite web |last1=De Rugy |first1=Veronique |title=Blame Insane Government Spending for Inflation |url=https://reason.com/2022/03/31/blame-insane-government-spending-for-inflation/ |website=reason.com |date=March 31, 2022 |publisher=Reason |access-date=4 April 2022 |archive-date=May 11, 2022 |archive-url=https://web.archive.org/web/20220511170305/https://reason.com/2022/03/31/blame-insane-government-spending-for-inflation/ |url-status=live }}</ref> etc. Conversely, negative demand shocks may be caused by [[contractionary]] economic policy. 
* ''Supply shocks'' may also lead to both higher or lower inflation, depending on the character of the shock. [[Cost-push inflation]] is caused by a drop in aggregate supply (potential output). This may be due to natural disasters, war or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices.<ref name=Britannica>{{cite web|url=https://www.britannica.com/EBchecked/topic/287700/inflation/3512/The-cost-push-theory|title=Encyclopædia Britannica|access-date=September 13, 2014|archive-date=September 7, 2014|archive-url=https://web.archive.org/web/20140907030214/http://www.britannica.com/EBchecked/topic/287700/inflation/3512/The-cost-push-theory/|url-status=live}}</ref> 
* ''Inflation expectations'' play a major role in forming actual inflation. High inflation can prompt employees to demand rapid wage increases to keep up with consumer prices. In this way, rising wages in turn can help fuel inflation as firms pass these higher labor costs on to their customers as higher prices, leading to a feedback loop. In the case of collective bargaining, wage growth may be set as a function of inflationary expectations, which will be higher when inflation is high. This can cause a [[wage-price spiral]]. In a sense, inflation begets further inflationary expectations, which beget further [[built-in inflation|(built-in) inflation]].<ref name=Britannica/>

The important role of rational expectations is recognized by the emphasis on credibility on the part of central banks and other [[policy-makers]].<ref name=Goodfriend/> The monetarist assertion that monetary policy alone could successfully control inflation formed part of the new consensus which recognized that both monetary and fiscal policy are important tools for influencing aggregate demand.<ref name=Goodfriend/><ref name=Blanchard/>{{rp|528}} Indeed, monetary policy is under normal circumstances considered to be the preferable instrument to contain inflation.<ref name=congress>{{cite web |title=Inflation in the U.S. Economy: Causes and Policy Options |url=https://crsreports.congress.gov/product/pdf/R/R47273/2 |website=crsreports.congress.gov |publisher=Congressional Research Service |access-date=15 October 2023 |date=October 6, 2022}}</ref><ref name=Blanchard/> At the same time, most central banks have abandoned trying to target money growth as originally advocated by the monetarists. Instead, most central banks in developed countries focus on adjusting interest rates to achieve an explicit inflation target.<ref name=Romer/><ref name=Blanchard/>{{rp|505–509}} The reason for central bank reluctance in following money growth targets is that the money stock measures that central banks can control tightly, e.g. the [[monetary base]], are not very closely linked to aggregate demand, whereas conversely money supply measures like [[M2 (economics)|M2]], which are in some cases more closely correlated with aggregate demand, are difficult to control for the central bank. Also, in many countries the relationship between aggregate demand and all money stock measures have broken down in recent decades, weakening further the case for monetary policy rules focusing on the money supply.<ref name=Romer/>{{rp|608}}

However, while more disputed in the 1970s, surveys of members of the [[American Economic Association]] (AEA) since the 1990s have shown that most professional American economists generally agree with the statement "Inflation is caused primarily by too much growth in the money supply", while the same surveys have shown a lack of consensus by AEA members since the 1990s that "In the short run, a reduction in unemployment causes the rate of inflation to increase" has developed despite more agreement with the statement in the 1970s.{{refn|name=EconomistsConsensus|<ref>{{cite journal|last1=Kearl|first1=J. R.|last2=Pope|first2=Clayne L.|last3=Whiting|first3=Gordon C.|last4=Wimmer|first4=Larry T.|year=1979|title=A Confusion of Economists?|journal=American Economic Review|publisher=American Economic Association|volume=69|issue=2|pages=28–37|jstor=1801612}}</ref><ref>{{Cite journal |last1=Alston |first1=Richard M. |last2=Kearl |first2=J.R.|author-link2=James R. Kearl |last3=Vaughan |first3=Michael B. |title=Is There a Consensus Among Economists in the 1990's? |date=May 1992 |journal=[[The American Economic Review]] |volume=82 |issue=2 |pages=203–209 |jstor=2117401 |url=http://www.weber.edu/wsuimages/AcademicAffairs/ProvostItems/global.pdf}}</ref><ref>{{Cite journal |last1=Fuller |first1=Dan |last2=Geide-Stevenson |first2=Doris |title=Consensus Among Economists: Revisited |date=Fall 2003 |journal=[[Journal of Economic Education|The Journal of Economic Education]] |volume=34 |issue=4 |pages=369–387 |jstor=30042564 |doi=10.1080/00220480309595230|s2cid=143617926 }}</ref><ref>{{cite journal|last1=Fuller|first1=Dan|last2=Geide-Stevenson|first2=Doris|title=Consensus Among Economists – An Update|year=2014|journal=[[Journal of Economic Education|The Journal of Economic Education]]|publisher=[[Taylor & Francis]]|volume=45|issue=2|page=138|doi=10.1080/00220485.2014.889963|s2cid=143794347|url=https://www.researchgate.net/publication/261884738}}</ref><ref>{{cite journal|last1=Geide-Stevenson|first1=Doris|last2=La Parra-Perez|first2=Alvaro|year=2024|title=Consensus among economists 2020—A sharpening of the picture|journal=[[Journal of Economic Education]]|publisher=[[Taylor & Francis]]|volume=55|issue=4|pages=461–478|doi=10.1080/00220485.2024.2386328}}</ref>}}

[[2021–2023 inflation surge#Housing shortage|Housing shortages]]<ref>{{Cite news |last=Derby |first=Michael S. |date=September 27, 2022 |title=Fed's Harker says housing shortage a key inflation driver |url=https://www.reuters.com/markets/us/feds-harker-says-housing-shortage-key-inflation-driver-2022-09-27/ |work=Reuters}}</ref><ref>{{Cite news |last1=O'Donnell |first1=Katy |last2=Guida |first2=Victoria |date=November 10, 2021 |title=Biden's next inflation threat: The rent is too damn high |url=https://www.politico.com/news/2021/11/10/rent-inflation-biden-520642 |work=Politico |quote=Housing costs just posted one of their largest monthly gains in decades, and many economists expect them to loom large in inflation figures over the next year heading into the 2022 midterm elections. It's not just economists — the Federal Reserve Bank of New York said in research released Monday that Americans on average expect rents to rise 10.1 percent over the next year, the highest reading in the survey's history.}}</ref><ref>{{Cite web |last=Boak |first=Josh |date=2024-03-15 |title=Why are so many voters frustrated by the US economy? It's home prices |url=https://apnews.com/article/biden-inflation-housing-trump-home-price-rent-248ef02e197c3a7ffb801e370c529d33 |access-date=2024-07-24 |website=AP News |language=en |quote=}}</ref><ref>{{Cite news |last=O'Donnell |first=Katy |date=March 18, 2022 |title=The main driver of inflation isn't what you think it is |url=https://www.politico.com/news/2022/03/18/housing-costs-inflation-00015808 |work=Politico |quote=But when it comes to the single biggest driver of runaway prices, Washington's hands are mostly tied. Skyrocketing housing costs may create even bigger problems for the administration going forward than oil and food price spikes, which are the result of sudden and unforeseen — but probably temporary — events. That's because there's no clear end in sight for shelter inflation.}}</ref> and [[2021–2023 inflation surge#Climate change|climate change]]<ref>{{Cite web |last=Borenstein |first=Seth |date=2024-03-21 |title=Higher temperatures mean higher food and other prices. A new study links climate shocks to inflation |url=https://apnews.com/article/inflation-climate-change-food-prices-heat-6e5297e12868aaf797529bb755268818 |access-date=2024-07-24 |website=AP News |language=en}}</ref><ref>{{Cite news |date=July 23, 2024 |title=Home insurance rates are rising due to climate change. What could break that cycle? |url=https://www.npr.org/2024/07/18/1198912918/home-insurance-rates-are-rising-due-to-climate-change-what-could-break-that-cycl |work=NPR}}</ref><ref>{{Cite web |last=Becker |first=William S. |date=2024-07-22 |title=Opinion: Climate inflation is eating your paycheck — and it's only going to get worse |url=https://thehill.com/opinion/energy-environment/4782252-climate-inflation-economic-impact/ |access-date=2024-07-24 |website=The Hill |language=en-US}}</ref><ref>{{Cite web |date=July 11, 2024 |title=How is climate change affecting food prices and inflation? |url=https://www.aljazeera.com/program/inside-story/2024/7/11/how-is-climate-change-affecting-food-prices-and-inflation |access-date=2024-07-24 |website=Al Jazeera |language=en}}</ref> have both been cited as significant drivers of inflation in the 21st century.

==== 2021–2022 inflation spike ====

{{main|2021–2022 inflation spike}}

In 2021–2022, most countries experienced a considerable [[2021–2023 inflation surge|increase in inflation]], peaking in 2022 and declining in 2023. The causes are believed to be a mixture of demand and supply shocks, whereas inflation expectations generally seem to remain anchored (as per May 2023).<ref name="Brookings">{{cite web |last1=Bernanke |first1=Ben |last2=Blanchard |first2=Olivier |title=What Caused the U.S. Pandemic-Era Inflation? |url=https://www.brookings.edu/wp-content/uploads/2023/04/Bernanke-Blanchard-conference-draft_5.23.23.pdf |website=www.brookings.edu |publisher=Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution |access-date=15 October 2023 |date=May 23, 2023}}</ref> Possible causes on the demand side include expansionary fiscal and monetary policy in the wake of the global [[COVID-19 pandemic]], whereas supply shocks include [[supply chain]] problems also caused by the pandemic<ref name="Brookings" /> and exacerbated by energy price rises following the [[Russian invasion of Ukraine]] in 2022. 

The term [[sellers' inflation]] was coined during this period to describe the effect of corporate profits as a possible cause of inflation: Price inelasticity can contribute to inflation when [[Consolidation (business)|firms consolidate]], tending to support monopoly or [[monopsony]] conditions anywhere along the [[supply chain]] for goods or services. When this occurs, firms can provide greater [[shareholder value]] by taking a larger proportion of [[Profit (accounting)|profits]] than by investing in providing greater volumes of their outputs.<ref>{{cite book |last1=Mankiw |first1=N. Gregory |title=Principles of economics |date=2015 |publisher=[[Cengage Learning]] |isbn=978-1285165875 |edition=Seventh |location=Stamford, Connecticut |pages=257–367 |language=en-us |chapter=Part V, chapters 13–17}}</ref><ref>{{cite web |last1=Bivins |first1=Josh |title=Corporate profits have contributed disproportionately to inflation. How should policymakers respond? |url=https://www.epi.org/blog/corporate-profits-have-contributed-disproportionately-to-inflation-how-should-policymakers-respond/ |website=Economic Policy Institute |access-date=25 May 2022 |date=21 April 2022 |archive-date=May 25, 2022 |archive-url=https://web.archive.org/web/20220525111507/https://www.epi.org/blog/corporate-profits-have-contributed-disproportionately-to-inflation-how-should-policymakers-respond/ |url-status=live }}</ref> Shortly after initial energy price shocks caused by the Russian invasion of Ukraine had subsided, oil companies found that supply chain constrictions, already exacerbated by the ongoing global pandemic, supported price inelasticity, i.e., they began lowering prices to match the [[price of oil]] when it fell much more slowly than they had increased their prices when costs rose.<ref>{{cite news |last1=Cronin |first1=Brittany |date=7 May 2022 |title=The good times are rolling for Big Oil. 3 things to know about their surging profits |url=https://www.npr.org/2022/05/07/1097177459/big-oil-exxon-earnings-gasoline-prices-crude |url-status=live |archive-url=https://web.archive.org/web/20220521123900/https://www.npr.org/2022/05/07/1097177459/big-oil-exxon-earnings-gasoline-prices-crude |archive-date=May 21, 2022 |access-date=25 May 2022 |work=NPR |language=en}}</ref>

The [[quantity theory of money]] has long been popular with [[libertarian-conservative]] critics of the Federal Reserve. During the COVID pandemic and its immediate aftermath, the M2 money supply increased at the fastest rate in decades, leading some to link the growth to the 2021-2023 inflation surge. Fed chairman [[Jerome Powell]] said in December 2021 that the once-strong link between the money supply and inflation "ended about 40 years ago," due to financial innovations and deregulation. Previous Fed chairs [[Ben Bernanke]] and [[Alan Greenspan]], had previously concurred with this position. The broadest measure of money supply, M3, increased about 45% from 2010 through 2015, far faster than GDP growth, yet the inflation rate declined during that period — the opposite of what monetarism would have predicted. A lower [[velocity of money]] than was historically the case<ref>{{cite news |title=Velocity of M2 Money Stock |url=https://fred.stlouisfed.org/series/M2V |publisher=[[Federal Reserve Bank of St. Louis]]}}</ref> was also cited for a diminished effect of growth in the money supply on inflation.<ref>{{cite news |last1=Hanke |first1=Steve H. |last2=John Greenwood |title=Inflation Was Always a Monetary Phenomenon, Never Transitory |url=https://www.nationalreview.com/2024/01/inflation-was-always-a-monetary-phenomenon-never-transitory/ |work=[[National Review]] |date=January 15, 2024}}</ref><ref>{{cite news |last1=Lynch |first1=David J. |title=Inflation has Fed critics pointing to spike in money supply |url=https://www.washingtonpost.com/business/2022/02/06/federal-reserve-inflation-money-supply/ |newspaper=[[The Washington Post]] |date=February 6, 2022}}</ref>