Everybody is talking about the fact that the current inflation derives from problems on supply chain distribution but Fed also printed tons of money.

How can they affirm that inflation is from supply chain problems and not from monetary expansion?

  • $\begingroup$ One thing you are asking is "How can one be sure?" This is somewhat of a loaded question because the burden of proof to economists and non-economists is quite different. Several answers below attempt to meet halfway. $\endgroup$ Commented Dec 17, 2021 at 1:00

3 Answers 3

  1. You are not citing any serious research, I don’t think there is any serious economist that would say inflation has nothing to do with monetary policy. So that seems like a straw man argument.

  2. Inflation depends both on money supply and output which depends on supply chains. Inflation is given by an equilibrium on money market which can be described using:

$$M/P = L(Y,i)\implies P=M/L(Y,i)$$

Where M is money supply, P price level Y real output and i interest rate. Inflation is change in P and both decline in Y and increase in M can cause inflation.

  1. There are no rigorous studies yet examining what is driving inflation now. However, casual observations seem to suggest that problem is not that the economy could not produce more but rather ports are clogged (eg see Fyfe 2011), trucking and flying is disturbed as well. Given this it is not unreasonable to think that supply chain issues are perhaps the dominant factor contributing to inflation.

However, that does not mean that monetary policy has no effect. Other countries currently also experience supply chain issues and different countries have widely different inflation rates. If nothing else any central bank could reduce inflation by tightening monetary policy and hiking interest rates if they would want to.


Inflation can be caused by a significant increase in the money supply and credit expansion. If this increase is not accompanied by a corresponding increase in the supply of goods in the market, commodity prices will inevitably rise. This can happen directly, by increasing the amount of money issued by the competent state authorities (central bank). It is done indirectly through the issuance of government bonds or other bonds and their sale to the banks, which use these securities to raise money from the central bank. Monetary expansion can also be caused by the multiplier operation of the banking system.

Inflation can also result from a strong increase in active demand. In this case, price increases are a result of increased demand relative to supply in an economy, especially because supply has very little or no elasticity, due to the full employment of available means of production and technology. The more inelastic the supply, the higher the inflation.

Inflation can also be caused if there is an increase in production cost data. This type of inflation is due to the weaknesses and distortions of the market mechanism, but also of the state mechanism. Among the factors that favor cost inflation are oligopoly practices, low labor productivity, wage increases at a faster rate of productivity growth, high tax burden, rising commodity prices, and so on.

The state can contribute to the creation of demand inflation through measures of expansionary fiscal or monetary policy, when the latter lead to an increase in demand, without a corresponding increase in supply. Also, an increase in indirect taxation could set prices up.

Finally, inflation can be imported, that is, caused by an increase in the prices of imported goods, external demand or the inflow of liquidity


Answer: Timing.

Spending on retail sales surged in the first quarter of this year:
enter image description here
and was immediately followed by acceleration in consumer prices enter image description here

I suppose it is possible that monetary policy was the cause, but it seems awfully coincidental that it occurred right after a massive increase in spending.

  • 1
    $\begingroup$ Any econ textbook will tell you that monetary policy creates inflation because more money in economy makes people spend more. So how can you say based on data you show that that: "I suppose it is possible that monetary policy was the cause, but it seems awfully coincidental that it occurred right after a massive increase in spending". The pictures you show on their own just support the claim that this is monetary policy. I am not saying it isnt supply chains but evidence you show is in favor of monetary policy - supply chains issues do not cause higher consumer spending monetary policy does. $\endgroup$
    – csilvia
    Commented Dec 17, 2021 at 11:29
  • $\begingroup$ @csilvia I can see two other reasons for the spending increase: a correction to the under-spending in 2020; and the trillions of $ of transfer payments given to households over the past year. $\endgroup$
    – Daniel
    Commented Dec 18, 2021 at 13:38
  • $\begingroup$ the transfer payments were largely funded by fed purchases of government bonds so that would again favor view that it was monetary policy, supported by fiscal policy not supply chains. Correction to under-spending could be a valid non-monetary reason but it has nothing to do with supply chains either $\endgroup$
    – csilvia
    Commented Dec 25, 2021 at 22:58

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