We Know How to Predict Inflation

By Rob Meyne / Dr. Robert Scott

  • April 14, 2022
  • 2-min read

Any list of the greatest economists of the twentieth century will include Dr. Milton Friedman of the University of Chicago. He wrote a number of essential economic treatises, and Free to Choose, written with his wife Rose, was a bestseller. Very few people have made a greater impact on economic thought and policy. (1)

Friedman had a knack for putting complex factors like inflation in simple terms. Few economic factors have a greater impact on average Americans. Prices have increased dramatically in the past year as Americans feel the pain at the gas pump, in the grocery, housing, and more.

Politicians and pundits assign blame. Currently, the Biden Administration is referring to the “Putin price hike,” blaming the Soviet leader for domestic inflation, even though the great majority of the price hikes under Biden came long before the war in Ukraine.

Fortunately, we can look to Dr. Friedman for nonpartisan insight. He said: “Inflation is always and everywhere a monetary phenomenon.” (2) He made analysis of inflation easier by using the following equation:

    Inflation equals
  • Percentage of increase in the money supply
  • – MINUS –
  • Percentage of increase in real GDP

When Dr. Friedman was discussing inflation in the late 1970s, he said real GDP (output) historically grew at about 3% annually. The actual inflation adjusted figure, from 1947 to 2020, was 3.1% per year.

Professor Friedman observed the money supply had been increasing by 10% per year. With a 3% increase in output, his equation projected inflation would be about 7%. That was incredibly accurate; the actual rate was 6.8%! In other words, the equation works.

Frankly, we should find that pretty scary if we look at recent numbers. From February of 2020 to February of 2022, the Federal Reserve increased the money supply at an astonishing 18.7% per year. The Fed currently projects a 2.8% growth in GDP for 2022, a reduction from the 4% projected in December. (3)

There is usually about a two-year lag between an increase in the money supply and the point when the inflation actual hits. The inflation increases we are now experiencing are the result of the past two years of rapid growth in the money supply.

To summarize, Dr. Friedman provided a simple equation to predict future inflation. Its accuracy has been confirmed by historical economic data. If we apply those principles to our current situation, it indicates annual inflation of well over 10%! Of course, it could even be higher.

When inflation was more than 6% in 2021, Fed Chair Janet Yellen called it temporary. Yet, inflation in January of 2022 was 7.5%. In February it was 7.9%. The figure is 8.5% for March. (4)

Yellen was wrong. Friedman’s genius and the historical record both give reason to be skeptical when the Fed, congressional leaders, or Biden Administration tell us inflation isn’t a serious concern. Or when they place blame on our adversaries rather than the out of control growth in the money supply. There is every reason to believe it is not temporary. The best evidence suggests we could be looking at double-digit inflation for years to come.

Take a look at some reference links below (and you might think about bookmarking them to refer back to):

  1. The Best Economists from 1900 to the Present
  2. Milton Friedman, Rose Friedman (1990). “Free to Choose: A Personal Statement”, p.272, Houghton Mifflin Harcourt
  3. The Fed lowered its US economic growth forecast in the face of war and inflation
  4. Consumer Price Index


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