A lot of new money is being poured into the U.S. economy…

Will the U.S. Fed’s Money Printing Cause Inflation?

… should U.S. citizens be worried about inflation and its corrosive effect on their income?

exchange of recent emails with a smart reader of one of my entries in this forum put in doubt the effect on prices that the Fed’s money-printing activities, and subsequent injection of those funds into the U.S. economy could have:

“Milton Friedman said something to the effect that inflation is first, last, and always a function of monetary policy. Yet at this time, with the Fed basically printing money, we don’t seem to have any inflation.”

E.W.H., email to me, June 2020

Yes, as a matter of fact, we have not seen any signs of inflation, although the Fed has been generating substantial increases in the monetary mass of the U.S. economy through its different pandemic easing-programs (corporate bond-buying, unemployment insurance, etc.) for a while now.

Furthermore, previous QE (Quantitative Easing) programs of the Fed, like the one to bail out the automotive industry, or the one to save financial institutions from bankruptcy, have not caused inflation.

Why not?, and What is different now?

Well, during the previous QE programs, the recipients of the Fed’s funds were not the general public, on the contrary, that money ended up engrossing the bank’s accounts, or the brokerage accounts of rich people, unlikely to modify their consumption patterns.

he Fed’s money printing today will in part, generate new funds to rescue industries like the cruise industry, or the airlines. Those funds will not cause a big CPI increase, but the price of real estate, stocks, bonds, gold, or bitcoins will go up (as we are seeing now), because the recipients of the majority of those funds will not be the general population, but already rich people, who would surely invest those funds, rather than to increase their consumption of goods and services which would increase the CPI.

But, at least part of the money printed by the Fed will be unemployment insurance, or also what is known as ‘helicopter money’, reaching vast sections of the American population, and possibly increasing the CPI, as those funds will be dedicated to the consumption of goods & services.

Intuitively, it could be argued that it is just a matter of time before inflation follows the dramatic increase of dollars generated by the Fed in the U.S. economy (in excess of two trillion dollars!).

We all know though, that shopping malls and a lot of stores remained closed for about three months due to the pandemic, and most customers stayed at home during most of that period, so it should not be surprising that, during that time, both, demand and supply of goods remained very low, consequently, there was no increase in the aggregate demand that could increase prices.

ut also, the economic theory came to our help, in the form of the controversial Phillip’s Curve, which establishes that there is an inverse relationship between inflation and unemployment:

The Phillips Curve establishes an inverse relationship between inflation and unemployment.

As we know, the economy of the U.S. is showing, at present, a large number of people unemployed:

The bad news is that many millions of people are still out of work, and the drop off in unemployment claims is no longer as steep as it had been in recent weeks. Roughly 20M Americans are still receiving unemployment benefits, down from a peak of 25M in May.

Newsletter ‘The Beef’, ‘The Headlines’ by Jeff Bishop & Jason Bond, June 17, 2020.

So, going back to the Phillips Curve, the large number of unemployed people at present could help to explain the low inflation rate the U.S. economy is currently experiencing, despite the Fed’s inflationary spending.

As the pandemic situation tends to normalize now, more and more people will be employed again (we cannot forget that the U.S. economy, prior to the coronavirus pandemic, enjoyed technical full employment (3–4% unemployment), although inflation was also surprisingly low, the Fed kept raising interest rates, anticipating an inflationary period), while simultaneously, more and more businesses will be open, and with the traditional high propensity to consume of the average U.S. consumer, it seems reasonable to expect an increase of prices.

You see, for the last 20 years, I have been purchasing my clothes in the U.S.

As I used to work for American companies, I visited Philadelphia, Miami, Atlanta, or New Orleans (depending on who my employer was at the time, and in what city its H.O. was located) 3 or 4 times a year, sometimes even more often, and I always took the opportunity to look for sales at gents’ shops in shopping malls.

During that period I observed a progressive deterioration of quality in the men’s clothes I purchased in the U.S., but no inflation, as the word causes terror to the average U.S. consumer. It’s the old case of the doughnut or the bagel, being sold at the same price as always before, but with a bigger hole on it!

I am sure readers of sufficient age would have noticed that in other items as well.

he most important obligation of the Government of any country is, in my opinion, to keep its governed citizens employed, even if that originates some degree of inflation.

In my humble opinion, a little inflation is good for the countries, provided of course that it is kept under control. With interest rates so low, and inflation also so low in the U.S. now (interest rates lower than 1%), the Fed should not have problems controlling it going forward.

Therefore, U.S. consumers should not worry too much about the upcoming inflation.



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Eugenio Magdalena

Eugenio is a disabled Economist (UCAB, Caracas), cursed a post-graduate Diploma in Marketing (Strathclyde University, Scotland, UK), and an MBA (England, UK).