Tag Archives: The Fed

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.

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