Yes, This Time We’ll Have Inflation, and Here’s Why

by James D. Gwartney
The American Institute for Economic Research

After several decades of relatively low rates of inflation, it is easy to think that we will continue to see little change in prices. But the seeds of inflation have been planted.

Purchases of financial assets, primarily Treasury securities, are the primary tool the Fed uses to control the money supply. When the Fed purchases Treasury securities, it provides the federal government with spendable funds. When these funds are spent, the money supply increases. Essentially, money is created out of nothing.

Since 2008, the Fed has expanded these purchases far more rapidly than in the past. Fed holdings of financial assets quadrupled during 2008-2019, expanding from $900 billion to $4.1 trillion. During the past 12 months, these purchases have surged another 80 percent, soaring to $7.47 trillion In February 2021.

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