June 29, 2006 | posted by Michael Baxter in Uncategorized |

Here’s a good title for an economics essay. Inflation isn’t a problem, it’s a symptom of a different problem. Discuss.

Today’s the day that Ben Bernanke and his chums at the Fed decide upon the rate of interest until when next they meet. You would have to look hard to find a commentator that does not expect to see a rate rise from the current level of 5 percent. Some even think a half a percent rise could be on the cards.

Inflation in the US is picking up, passing 4% recently, and even hitting 5% in May. And Mr Bernanke, just like Greenspan in 1987 when he took over, and Paul Volcker in 1979, is upping the rate of interest; he is demonstrating his inflation fighting credentials.

But if you are a believer in the idea that inflation, as Milton Friedman put it, is always a monetary phenomenon, here’s some news to make markets shudder.

According to a survey carried out by Bloomberg, economists reckon the US money supply grew by 8.8% from a year earlier, matching the rise seen last month.

According to Friedman, that makes inflation a foregone certainty. And according to CNNMoney, Bernanke is a Friedman advocate.

Put two and two together, and unlike banking, which will often go out and create more money from its holdings, you get four. And in this case, four means inflationary pressures are mounting in the US. No wonder many fear today’s almost certain rise, will be followed by several more.

For further information

European Money-Supply Growth Probably Ran at a Three-Year High Bloomberg

Bernanke flexes his muscles CNNMoney