There is only one cause of inflation: federal deficit spending financed by new money creation.
The 40-year high inflation the United States has experienced post-COVID has resulted in substantial hardship for Americans. Rising prices have reduced Americans’ purchasing power and standard of living.
President Biden and other commentators have blamed “corporate greed” for inflation. The allegation is that greedy corporations are increasing their prices to increase their profits. Is there anything to this? Why weren’t corporations raising prices prior to the pandemic when inflation was less than 2%? If corporations are greedy, then they were just as greedy in 2019 as in 2024.
The goal of corporations is to maximize their profits. Maximizing profits is no greedier than a worker trying to maximize his wage. Competition and consumer preferences put a check on the price an individual business can charge. McDonald’s cannot charge $50 for a Big Mac because consumers can buy a hamburger at a competing restaurant for much less and the typical consumer will not view a hamburger as being worth $50.
Corporate profits are a component of gross domestic product (GDP). Gross domestic product is the total value of all final goods and services produced in the United States during a year. This also equals income, including corporate profits generated from producing these goods and services. Corporate profits comprise about the same share of GDP as they did prior to the pandemic. This fact and economic theory illustrate that inflation is not due to corporate greed.
There is only one cause of inflation, which is federal deficit spending financed by new money creation. Both happened at astronomical levels during the pandemic and continue after it. Federal spending remains $1 trillion higher than its pre-pandemic trend, currently resulting in a $1.5 trillion dollar deficit. If federal spending only was increasing at its pre-pandemic trend, the budget deficit would be a much more manageable $500 billion.
During the pandemic, approximately $4 trillion in COVID “stimulus” was poured into the economy, which was financed by Federal Reserve money printing. The Federal Reserve more than doubled the money supply, from $3.4 trillion in February 2020 to $7.5 trillion in May 2024, which is how interest rates remained at record lows during this spending binge. All of this is a textbook recipe for inflation.
Both parties bear culpability for inflation, but the American Rescue Plan, signed into law by President Biden on March 11, 2021, bears the most. At nearly $2 trillion, it was the largest piece of COVID stimulus and enacted when the economy was well on its way to recovery. Deficit spending financed by monetary creation will be inflationary when the economy’s productive resources are being utilized. In contrast, the stimulus signed by President Trump occurred in March 2020 when much of the economy was idle and thus, less inflationary.
Only through an understanding of where inflation comes from can we have a serious conversation about how to reduce it. To find the blame for inflation, politicians and the Federal Reserve need to stop blaming corporations and start looking in the mirror.
