This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Is Inflation a Psychological or a Monetary Phenomenon?

NEW YORK ( TheStreet) -- Over the years, many things have been wrongly cited as inflation drivers. High resource costs, low unemployment, high oil prices, extreme weather and even an economy with healthy demand have been falsely accused at times.

That list of unwarranted scapegoats got a new member last week, when an IMF report suggested inflation may be tied to ... inflation expectations.

Here's the logic. According to the report, because people generally have confidence in their central bank's ability to meet its self-imposed inflation target over time, future inflation expectations are more a function of the central bank's target than the current inflation rate, and this is somehow a self-fulfilling prophecy. And, as a corollary, when inflation expectations become "disanchored" from the target -- when expectations are materially higher -- that, too, is self-fulfilling.

Problem is, this assumes inflation is always and everywhere a psychological phenomenon. Yet evidence overwhelmingly shows inflation is a monetary phenomenon -- too much money chasing too few goods.

Inflation's driven by money supply, money velocity and the supply of goods and services, and none of those is a psychological thing. Money supply is driven largely by central banks and cross-border capital flows. Money velocity is largely a function of bank lending -- if banks lend more, businesses have more capital to spend on new technology, equipment and the like, and that money gets re-spent again and again. If banks lend less, money moves more slowly. The third variable, supply of goods and services, is also fundamental. Infrastructure bottlenecks, import caps, price controls and the like can all cause supply shortages, which drive prices higher.

Brazil provides a timely example of this. In recent months, supply chain bottlenecks, fuel and energy price controls, import restrictions and high industry-specific taxes have hurt production, broadly limiting the supply of goods available.

Compounding matters, the government's haphazard efforts to boost the economy -- currency intervention, "Buy Brazilian" policies, forcing down bank lending rates and offering one-off tax incentives for various industries -- have stymied private investment.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
AAPL $124.43 -1.54%
FB $82.22 -1.18%
GOOG $548.00 -0.73%
TSLA $188.77 -0.94%
YHOO $44.44 -1.15%


DOW 17,776.12 -200.19 -1.11%
S&P 500 2,067.89 -18.35 -0.88%
NASDAQ 4,900.8850 -46.5560 -0.94%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs