No, Putin did not cause inflation

The May 2022 Consumer Price Index (CPI) release was worse than virtually any forecast. Year after year the CPI came in at 8.6 percent, not exceeding expectations but reaching a new four-decade high. The month-over-month CPI (April to May) exceeded expectations: 1 percent vs. 0.7 percent surveyed. Today’s release makes it clear that the Fed is behind the curve in taking policy measures to blunt inflation. The Biden administration’s response, meanwhile, has been to blame Vladimir Putin (an easily unsubstantiated claim) and to operate on the rising cost of intervening policy measures.

It’s worth noting that while the Fed was confusing – classifying price increases that began in the spring of 2021 as “temporary” – they have added a litany of additional missions to their already difficult mandate. Over the past few years, the Fed has been tasked with formulating fiscal policy in a way that clearly supports social justice, climate change, the ESG, and other political goals.

This is not particularly surprising given the trend of mission creeps since the inception of the Fed. Initially, the Fed was tasked with preventing financial panic and bank runs. When millions of older foreigners return from the battlefield after WWII, Congress adds the requirement that the Fed should conduct monetary policy in a way that maximizes employment. 1978 Both “reasonable price stability” and “maintenance”[ence] Long-term growth ”was linked to the Fed mandate, and financial stability was added to the Fed’s list of responsibilities after the 2008 financial crisis.

When, in addition to this, one considers the recent administration’s efforts to recruit ideological candidates to the Fed, it becomes easier to explain mistakes and failures. The significant advantage of monetary policy over the monetary policy system, especially without having to go through congressional horse trading, makes the incentive to influence the Fed easily clear.

During President Biden’s speech in Los Angeles this afternoon, he referred to inflation, or at least part of its power, as “Putin’s tax.” This is a blatantly false characterization of current inflation. In fact, almost a year before the start of the Ukrainian conflict, in March 2021, prices began to rise above the trend by any number of measures. Six months before the start of the war in Central Europe, in September 2021, prices began to rise for the second time.

WTI and national average price of gasoline per gallon, 2021 – current

(Source: Bloomberg Finance, LP)

The WTI price increase was mostly demand-driven: $ 47.47 per barrel in January 2021, and doubled to $ 95 per barrel between February ’22. Prices have risen by about $ 118 a barrel since the war began. The average U.S. price of gasoline was $ 2.57 per gallon in January 2021 and reached $ 3.75 per gallon in early February 2022. Inflation was more widespread by the end of 2021, but it was only in November that the Fed began to retreat. Assurance that price level rise was transient. To make matters worse, it wasn’t until March 2022 that the Fed began implementing measures to stem the rise in prices.

US CPI (yoy), 2021 – Current

(Source: Bloomberg Finance, LP)

The May 2022 CPI numbers released today show that inflation is not only rising, but getting worse by the Fed. More prices are rising faster, and probably accelerating. The Fed needs to act aggressively enough that the effects of the recession are now materially greater than they were a few months ago. Allowing political officials to blame Putin, big corporations, shipping firms, billionaires, inadequate taxes, “greed” or any of the other tired sacrificial goats confuses the public. It is a politicization and distracts attention from the detrimental effects of the increasingly influential central bank.

Peter C. Earle

Peter C. Earle

Peter C. Earle is an economist and author who joined AIER in 2018. He has previously spent more than 20 years as a trader and analyst at a number of security firms and hedge funds in the New York metropolitan area, as well as running a gaming and cryptocurrency consultancy.

His research focuses on financial markets, cryptocurrency, monetary policy issues, game economics, and economic measurement issues. He has been quoted in the Wall Street Journal, Bloomberg, Reuters, CNBC, Grants Interest Rate Observer, NPR and numerous other media outlets and publications.

Pete holds an MA in Applied Economics from American University, an MBA (Finance) and a BS in Engineering from the United States Military Academy at West Point. Follow him On Twitter.

Selected publications

“General Institutional Considerations of Blockchain and Emerging Applications” co-authored with David M. Waugh CryptoAsset Emerald Handbook: Investment Opportunities and Challenges (Forthcoming), edited by Baker, Benedetti, Nickbacht and Smith (2022)

“Operation Warp Speed” co-authored with Edward Escalant Epidemic and freedom (Forthcoming), edited by Raymond J. March and Ryan M. Yonk (2022)

In “A Virtual Weaver: Hyperinflation in Diablo III” Invisible Hands in the Virtual World: The Economic Order of Video GamesEdited by Matthew McCaffrey (2021)

Philip W. Magnus, co-author of “The Science of Lockdown”, The Wall Street Journal (December 2021)

“How does a well-functioning gold standard function?” Co-author with William J. Luther, SSRN (November 2021)

In “Popular Prophets, Public Prophets: Pied Pipers of Lucre, Then and Now” Financial history (Summer 2021)

In “Boston’s Forgotten Lockdown” American conservative (November 2020)

In “Private Governance and Rules for a Flat World” Creighton Journal of Interdisciplinary Leadership (June 2019)

“The idea of ​​a ‘federal job guarantee’ is expensive, misleading and increasingly popular with Democrats.” The investor’s business is daily (December 2018)

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